Purpose : The chief objective of this paper is to establish ecological intelligence of Indian Companies visa-a-vis less ecological intelligence of Companies and to analyse to what extent ecological intelligence influence adoption of ecological accounting and reporting practices among Indian Companies.
Design/Methodology/Approach: This research begins with designing two hypotheses and based on which two models are proposed. Variables concerning internal ecological accounting procedures are considered as independent variables and the score of the company on its ecological intelligence is considered as the dependent variable. Stepwise regression is applied to test the above two models of ecologically intelligence and non ecological intelligence to explore and establish ecological intelligence of select companies.
Findings : chi-square test portrays adoption of ecological accounting procedures is significantly higher for companies classified as operating in ecologically intelligent industry groups. Stepwise regression justified the two hypotheses and show the effectiveness of the model proposed by establishing greater number of companies in ecologically intelligent reported ecological information through annual reports.
Research Limitations/implications: This paper examines ecological intelligence of the Industry as a factor associated with the adoption of ecological accounting and control procedures. The results of the study highlights a concern as firm move towards triple bottom line reporting and how traditional accounting information system to be modified to face this challenge in developing countries.
Originality/Value: This research considers the adoption of ecological accounting procedure by the select Indian companies hypothesizing that companies in the more ecologically intelligent industry groups are more likely to have adopted such procedures. And further paper shows how readily this culture can be adopted by Indian Companies.
I
a. Introduction and Rationale
A Significant amount of literature has established ecological obligation as a key organizational issues in developing countries too in recent times . Similarly, there is now also a growing body of literature that discusses the triple bottom line concept, which force the companies to address not only the financial and economic but also social and ecological of performance to recognize their interdependence, and to integrate them into the report process. Research focus on the social and accounting literature has continuously debated the need for business corporations to operate in an environmentally and sustainable manner (see for example, see Bebbington, 1997; Gray, 2001; Gray et al., 1996, 1998; Owen et al., 1997, 2001). This literature has promoted the supposition that corporate ecological intelligence practices are key corporate commitments which concur with these social responsibilities (O'Dwyer, 2003).
The literature on this topic is broadly divided as investigating accounting practices dealing with: specific issues Rubenstein 1990; 1991; 1992); entities (Bennett and James 1998b; Porter and van der Linde 1995; Schroeder and Winter 1997); or prescribing models or concepts that firms may consider in the introduction of ecological-related management accounting systems or procedures (Azzone et al. 1996; Bennett and James 1997; Burritt 1997; Epstein and Roy 1997; Krueze and Newell 1994; Parker 1996; Russell et al. 1994; Smith and Lambell 1997). Research studies undertaken found that corporate ecological intelligence does motivate firms to undertake corporate ecological reporting (Deegan and Gordon 1996; Patten 1992, Geoffrey R. Frost and Trevor D. Wilmshurst, 2000).
In spite of change in expectations, research studies on factors influencing ecological accounting has been limited to investigating general issues that motivate firms to undertake ecological-related external reporting (see, for example, Deegan and Gordon 1996; Deegan and Rankin 1996; Patten 1992). Good amount of previous research has found that industry ecological intelligence does motivate firms to undertake corporate ecological reporting (Deegan and Gordon 1996; Patten 1992).
The arguments made by Margolis and Walsh (2003) have been explored in the expansive environmental accounting literature and factors forcing corporate ecological intelligence, but there has been little application of these ideas to developing economies. It is witnessed that corporate environmental disclosure practices have matured in some parts of the developed world, but it remains a strange phenomena for the developing world.
b. Prior Research
Introduction of ecological accounting by companies has been widely highlighted (see, for example, Bennett and James 1998a; Ditz et al. 1995; Epstein 1996). A number of studies have observed that such practices have resulted in cost savings (Schroeder and Winter 1997) and competitive advantage (Porter and van der Linde 1995). Such research has corresponded with discussion on the development of appropriate accounting systems and the advantages of such processes, and increased attention on triple bottom line reporting by entities (see, for example, Dow Chemicals Public Report 1999; and Shell Report 1998; 1999; 2000 for the progression of this concept in a business entity), and in the literature (Atkinson 2000; Bennett and James 1997; Ranganathan 1998; Ranganathan and Willis 1999; Sharma 1999; Whittaker 1999).
There has also been considerable discussion of the role of the accountant and accounting in ecological management (see, for example, Barbera 1994; Burritt and Gibson 1993; Kestigian 1991; Milne 1996; Willits and Giuntini 1994). The emphasis has been upon activities where accounting can assist in improving ecological management; for example, the identification and allocation of ecological-related costs (Burritt 1997; Krueze and Newell 1994), the accountants' role in strategic management (Smith and Lambell 1997), in capital investment decisions (Epstein and Roy 1997), or as an extension of the traditional audit function (Label and Tandy 1998).
The studies surrounding the triple bottom line and sustainable development is a part of an evolving discussion of the importance of the firm in achieving a more holistic level of accountability. There is also a growing recognition that traditional accounting practices are not able to provide this accountability. The measurement of the three aspects of the triple bottom line (financial/economic, ecological and social), and their integration has elevated the accounting profession.
The present study contributes to the body of knowledge through an analysis of the adoption of ecological accounting and disclosure practices. In this study it is hypothesised that firms operating in the more ecologically intelligent industries will have developed more comprehensive ecological accounting practices than firms in less ecologically intelligent industries. Exploring these hypotheses, this paper is designed as follows: First, a review of ecological accounting is undertaken. Second, hypotheses are stated with respect to the relationship between the development of accounting practices and the ecological-intelligence of the firm. Data analysis and results are shown in the third section. Discussion and conclusions are drawn from the analysis in the final section.
II
Objectives and Hypotheses
The increased attention on ecological issues has drawn more heavily on those companies which are identified as more ecologically intelligent such as companies engaged in the mineral and resource, petroleum, and the chemical industries (see Deegan and Gordon 1996). As a result the industry in which the firm operates has been identified as a factor influencing the level of corporate social disclosure, although the justification for such influence has been shown to be varied (see, for example, Azzone et al. 1996; Cowen et al. 1987; Deegan and Gordon 1996; Dierkes and Preston 1977; Hackston and Milne 1996; Kelly 1981; Patten 1991; Roberts 1992). Observed variations in the level of social responsibility reporting is possibly due to a number of influences; for example, different regulative ecologicals, community perceptions and expectations of performance (Elkington et al. 1991), or industry membership as a major source of a firm's public exposure, or political visibility (Kelly 1981; Panchapakesan and McKinnon 1992; Patten 1991; Roberts 1992). It can be anticipated, therefore, that a firm within the retail industry will have different ecological management procedures and policies than a similar sized firm in the extractive or chemical industry. In other words, the activities undertaken increase the scrutiny of the firm by a diverse group of interested stakeholders. To counter this increased scrutiny, it is argued that management increases the level of ecological accounting ( Deegan and Gordon 1996, Pattern1992).
Research on ecological reporting practices has not explored the internal corporate practices necessary to support such reporting practices. Firms operating in the more ecologically intelligent industries are faced with increased pressure to improve ecological performance. Management in these industry groups are more likely to identify the ecological as important, and to divert resources to improve ecological-related performance. In these firms it would be expected to find a more formal ecological management system, thereby placing the firm in a better position to assess environ- mental information for the external reporting process. Observation of increased reporting by firms operating in ecologically intelligent industries may then be a function of both increased demand for ecological-related information, and a corresponding increased sophistication of an ecological management system that generates such information.
This Research is designed with the following objectives:
to demonstrate the present practice of ecological accounting and reporting practices among Indian Companies.
to establish ecological intelligence of Indian Companies visa-a-vis less ecological intelligence of Companies.
to analyse to what extent ecological intelligence influence adoption of ecological accounting and reporting practices among Indian Companies.
to provide a platform for further research and to stimulate Indian companies to adopt ecological accounting and reporting practices.
The study is under taken with the following hypotheses :
H1 Companies in ecologically intelligent industries are more likely to introduce ecological accounting procedures than firms in less ecologically intelligent industries.
H2 Companies in ecologically intelligent industries are more likely to externally disclose ecological information than firms in less ecologically intelligent industries.
Based on the above hypotheses, the following two models are proposed.
To form the relationship between internal ecological accounting procedures and the ecological intelligence of the companies.
To establish the relationship between ecological intelligence and the degree of disclosing ecological information in annual report.
For the above two models, variables concerning internal ecological accounting procedures are considered as independent variables and the score of the company on its ecological intelligence is considered as the dependent variable. Accordingly data was collected.
c. Research Methods
The study considers the adoption of ecological accounting procedures by the select Indian Companies, hypothesizing that companies in the more ecologically intelligent industry groups are more likely to have adopted such procedures.
Data for this study is colleted through a mailed questionnaire posted to the Chief of Accounting and Finance Departments of 130 Indian Companies listed on BSE & NSE companies. The Chief of the Accounting and Finance Departments are selected as the target of this study as they are responsible for over seeing the overall accounting functions within the Company.
In total, survey instruments are posted to 130 companies of which 91 responses are returned. The final sample included 59 firms identified as being involved in ecologically intelligent industries, and 32 in less ecologically intelligent industries.
Ecologically intelligent sample included 14 companies from fertilizers, 15 from Chemical, 10 from petrochemicals, 12 from pharmaceutical companies, 8 companies from steel and iron manufacturing.
A test of non response bias is undertaken by applying the early late hypotheses technique that suggests that late returns are often similar to non response.
Proximity matrix was constructed by using Euclidean distance to identify how much the highly intelligent and lesser intelligent companies differ in their response towards different ecological practices that are carried out in the company.
Stepwise regression is applied to test the above two models of ecologically intelligence and non ecological intelligence to explore and establish ecological intelligence of select companies.
III
Data Analysis and Results:
The results discussed below indicate that there are differences between the more and the less ecologically intelligent firms. However, while the descriptive data identifies numerical differences they are often not statistically significant.
The data is analysed from five important aspects of adoption of ecological accounting and reporting by both ecological intelligence and less intelligent companies:
Introduction of ecological information within existing accounting system, which is the first step in adoption of ecological accounting and reporting in a company.
Standalone ecological accounting procedure which deals with identification, measuring, recording and analysis of specific ecological issues.
cost benefit analysis
ecological audit
ecological reporting either through annual reports or other sources
The analysis of descriptive results of the survey, with an independent samples chi-square test portrays whether the adoption of ecological accounting procedures is significantly higher for companies classified as operating in ecologically intelligent industry groups. Similarly proximity matrix test administered to cluster the responses of the both intelligent and non intelligent firms.
Table 1 identifies the specific areas within the management information system of the respondents' firms where ecological issues are incorporated based on the results from the survey.
The above table indicates that although a greater proportion of intelligent organisations include ecological information within all identified existing systems, only for the costing system is this difference significant ( 0.9952 p < 0.005).
Stand alone Ecological Accounting Procedures
Another important step in introduction of ecological accounting is the identification and analysis of specific ecological issues. The specific issues identified for analysis include; waste, energy usage accounting, accounting recycling, returnable packaging/containers, pollution, accounting for rehabilitation, ecological contingent liabilities, life cycle cost analysis in product development, ecological costs in production costs and addressing legal regulations.
Respondents are asked to identify if specific ecological issues are analysed by their firm's accounting information system. The data from intelligent and less-intelligent industries is analysed, and is summarized in Table 2.
As is witnessed, the adoption of accounting procedures by the more ecologically intelligent industries for rehabilitation accounting, life cycle cost analysis, ecological costs in production costs and product costing is significantly greater than for the less ecologically intelligent industries which is significant
( 0.945 p < 0.005).
Ecological cost benefit analysis
Ecological cost benefit analysis may be undertaken on issues such as energy efficiency, by-product use, recyclable containers/packaging, waste management, pollution minimization, site contamination and site cleanup.
Respondents are asked to identify areas of cost benefit analysis in which ecological concerns had been included. The results shown in the above table indicate that there is a significant difference for the adoption of cost benefit analysis of waste management, pollution minimization and site contamination at 0.05 i.e.( 0.9965 p < 0.005, 0.9864 p < 0.005, 0.9912 p < 0.005) respectively.
Ecological audits
As identified and highlighted by Bennett and James (1997), ecological impact assessment as the fifth aspect of ecological-related management accounting.
Respondents are asked to identify whether the specific ecological audits has been implemented by their organisation. The data on the adoption of ecological audit procedures along with and the analysis of industries is summarized in Table No. 4
Table 4 indicates that a significantly greater proportion of firms in the more ecologically intelligent industries conducted general environmental audits at (0.9963 p < 0.005).
Ecological reporting
Previous studies have shown that ecologically intelligent is an influential factor associated with external ecological reporting. To test that the sample examined in this study could be considered comparable to prior research that investigated industry ecological intelligence on reporting practices, respondents are asked to indicate whether their organisation have discloses ecological information if so either in the annual report or other sources of external disclosure which is displayed in Table 5.
Table 5 indicates that there is a significantly higher adoption of ecological reporting practices by firms in the more ecologically intelligent industries at (0.963 p<0.05). This correlates with prior research on ecological reporting practices (Kelly 1981; Roberts 1992).
Similarities in response for each case by highly intelligent and lesser intelligent companies are done by considering the Euclidian distance between the two responses. Proximity matrix is derived to get the difference in response by the two companies for each case. The lesser the value, the more similar the response is.
From the above proximity matrix there is huge difference of opinion regarding Risk Assessment and lesser difference regarding the budgeting system and Performance measurement and Appraisal given by the respondents in respect of high and less intelligent companies.
From the above proximity matrix, it is clear that there is close similarity of responses regarding pollution but much difference was seen in case of addressing legal regulations.
From the above proximity matrix, it is surprising to note that there is much similarity of opinion regarding the waste management but differ in terms of the site cleanup.
It can be understood from the above proximity matrix, there is much similarity of opinion regarding performing a general ecological audit but not much on performing a waste audit.
From the above proximity matrix it is seen that there are some difference of opinion regarding the reporting in both annual report and other than the annual report.
Stepwise multiple regression was used to test the effectiveness of the model. The combined scores of the three broad variables in case of internal procedures adopted and two broad variables in case of reporting are considered for this purpose. The results are tabulated in table 11 and table 12 with regard to the two hypothesis formed.
The variable that is first entering into the equation is Ecological accounting within Existing system (F=88.403, p<=0.001)) accounting to 49.8% of variance. The other variables to enter into the equation are in the order of Cost Benefit (F=61.111, p<=0.001) with combined variance of 57.2% and Ecological accounting procedures (F=48.171, p<=0.001) with a combined variance of 61.1%.
The variable regarding Audit entered into the equation (F=48.275, p<=0.001) with a variance of 34.4%. The regression equation gained a variance of 43.3% with the introduction of Report variable (F=35.323, p<=0.001).
IV
Discussion and Conclusions
The objective of this research was to examine whether the ecological- intelligence of the industry would influence the firm's development of ecological-related management accounting. It was therefore hypothesized that firms in more ecologically intelligent industries would adopt ecological-related management accounting procedures more frequently than the less ecologically intelligent industry group.
The results of the analysis confirmed that for the study sample a significantly greater number of firms in ecologically intelligent industries reported ecological information (Table 5), which is consistent with prior research on reporting practices.
The analysis has reported good amount of differences between the two samples for specific activities, however these primarily related to actions associated with the intelligent industries, such as site contamination and cleanup (Table 3) and rehabilitation (Table 2). These observations may be more a reflection of companies being active in areas that are peculiar to their industry, in which regulations are imposed, rather than a general increased commitment to ecological-related management accounting.
It is further noticed that a significant difference was observed on issues relating to ecological costs included in production costs (Table 2), and the costing system (Table 1). Firms classified as ecologically intelligent would have a greater impact upon the ecological, hence it would be expected that they incurred greater costs associated with the ecological concerns. It is therefore not surprising to find that they are more likely to be aware of ecological-related costs.
In respect of general ecological audits, which would include compliance audits, it is not surprising to again observed a significant difference due to the greater regulatory restrictions imposed upon these firms. The results on specific audits relating to waste and energy did not show a significantly higher level of adoption by ecologically intelligent industries. This may be because waste and energy usage is a significant source of cost to firms whatever their industry activities.
This research shows that for ecological issues of a general nature, there was no significant difference in the level of adoption of ecological accounting procedures. For example, no significant difference was observed in the adoption of accounting for waste, energy usage or recycling. Such issues may be considered relevant to a firm regardless of the industry in which it operates. This observation may also highlight a limitation in the dichotomous generalization of industries that does not account for specific ecological issues. Hence, the significant observation for rehabilitation (which is an issue of concern primarily for the mining industry) would be expected, but also it is not surprising to observe no significant difference in the adoption of accounting for recycling. Such a limitation does present itself as an area for further research using a more refined means of classifying industry, and matching with issues that are relevant to the industry.
It is witnessed that there was a significant difference observed in the adoption of ecological reporting, which is consistent with prior research. The failure then to observe a significant difference in the adoption of ecological-related management accounting practices may suggest alternate factors motivating the adoption of reporting and management systems. Additionally it is observed that there are not clear links between the generation of accounting information and the disclosure of ecological information within the annual report in respect of sensitive industries.
The proximity matrix shows that there is a difference in the opinions of the both the intelligent and non intelligent firm in respect of two hypothesis which is in accordance with the hypothesis formed.
Stepwise regression justified the two hypotheses and shown the effectiveness of the model proposed. It is observed that the more ecologically intelligent the organization is, the more it is likely to adopt ecologically accounting procedures and is more likely disclose ecological information.
The results have highlighted that the level of adoption for many activities was limited. This may not be unexpected for firms operating in the less ecologically intelligent industries, but certainly raises questions of those firms in the ecologically intelligent industries. Such observations provide some support for prior discussion that has been critical of traditional management accounting in its inability to adequately monitor and allocate costs associated with ecological activities. There does however need to be further research as to why firms have not identified the adoption of accounting for certain activities.
It is established in conclusion, that 'ecologically intelligent' firms are more likely to adopt ecological accounting procedures is only supported for activities that are associated with significant ecological-related issues for the specific industries. Hence, this study provides conclusive evidence that the ecological-intelligence of the firm's operations will necessarily result in increased likelihood of the development of ecological accounting procedures. The results of this study highlight a concern as firms move toward triple bottom line reporting and raise challenges as how will the traditional accounting information system be adapted to meet the change in the nature of the reporting framework that will be required, and how readily can the culture of the organisation assimilate the change.
