34894281 Enviromental Auditing

- 1 -

of 16

ZANZIBAR INSTITUTE OF FINANCIAL ADMINISTRATION

ADVANCED DIPLOMA IN ACCOUNTANCY YEAR 111

“AUDITING AND INVESTIGATION -AC33”

ENVIROMENTAL AUDITING

UNIT No FOUR

Prepared by: H.B.Hamad.

- 2 -

of 16

ENVIROMENTAL AUDITING

INTRODUCTION.

Global warming, the potential impact of ecological accidents as well as the hysteria

surrounding events such as sea water pollution, Lake Victoria contamination, Mad Cow

disease underlie society's awareness and concern about the quality of the environment,

especially, corporations' role and responsibility in that regard. (For instances, does any

one has ever perform an environmental evaluation in Chwaka before and after

establishing this ZIFA. Increasing number of plastic bags around the village is one of the

best explainable example of environmental distractions) from this concern, resulted in a

significant tightening of environmental legislation in most Western countries, with

accounting regulators also getting involved through several initiatives that mandate, or

encourage, firms to disclose environmental efforts, costs and achievements in their

financial statement. Despite of its important, it is however, not given much attention in

developing counties like Tanzania regardless of its impact.

In principle, environmental auditing can be done by any person from ranges of discipline;

it can be accountant, scientist, engineers external or internal auditors or any one but most

of time it is done by multidisciplinary team so as to avoid a too strong focus on

procedures.

As the matter of facts, no one can differentiate between environmental audits from pure

financial audit. i.e. a Financial audit, With exception to environmental auditing being

largely unregulated, the general approach to both types of audits is similar. Both audits

place an emphasis on the evaluation of control systems. It is highly recommended to

include External auditors to the environmental process regardless; they are not belonging

to the organization.

- 3 -

of 16

DEFINITIONS

1. Environmental audit is the audit of a business to assess its impact on the

environment.

2. Environmental auditing is the systematic examination of the interactions between

any business operation and its surroundings. This includes all emissions to air,

land and water, legal constraints, the effects on the neighboring community,

landscape and ecology and the public‟s perception of the operating company in

the local area.

3. Environmental audit is a systematic, documented and objective evaluation of the

management, organization and equipment of the facility or activity in relation to

the protection of the environment.

4. Environmental auditing is a management tool comprising a systematic,

documented, periodic and objective evaluation of how well environmental

origination, management and equipment are performing with the aim of helping to

safeguard the environmental by:

Facilitating management control of environmental practices

Assessing compliance with company polices, which would include

meeting regulatory requirements.

Environmental auditing has emerged as an important and integral part of environmental

management systems.

Audits serve as a management tool to help measure a company's environmental

performance against environmental regulations, as well as internal company policies and

operational procedures.

In addition, environmental audits can provide a level of assurance to senior management

that the activities at their facility or organization do not pose an unreasonable risk to the

company or the environment.

The process can assist a corporation and its officers in limiting liability by identifying

potential problems and recommending corrective actions.

- 4 -

of 16

The auditing process is designed to

(1) verify compliance with corporate environmental requirements;

(2) evaluate the effectiveness of existing environmental management systems; and

(3) assess risks from regulated and unregulated materials and practices.

CORPORATE ENVIROMENTAL DISCLOSURE.

Corporate environmental disclosure is the set of information items that relate to a firm‟s

past, current and future environmental management activities and performance.

Corporate environmental disclosure also comprises:

Information about the past, current and future financial implications resulting from a

firm's environmental management decisions or actions. This information items can take

many forms, e.g., qualitative statements, quantitative facts or assertions, financial

statements' figures or footnotes. The realm of environmental disclosure encompasses the

following items: past and current expenditures or operating costs for pollution control

equipment and facilities; future estimates of expenditures or operating costs for pollution

control equipment and facilities; site restoration costs; financing for pollution control

equipment or facilities; present or potential litigation; air, water or solid waste releases;

description of pollution control processes or facilities; compliance status of facilities;

discussion of environmental regulations and requirements; environmental or conservation

policies, environmental awards or prizes; existence of environmental management or

audit departments, etc

This information can be conveyed to ultimate users especially, shareholders in almost is

three major ways:

1. Corporate voluntary disclosure.

In this context, a firm is trying to disclose its information regarding all environmental

issues undertaken or risk faced by that firm voluntarily. The potential value of voluntary

information disclosure by firms is well recognized and in theory, firms should voluntary

reveal all the information they have. They argue that if investors believe that managers

are withholding information, they will consider the undisclosed information to be

- 5 -

of 16

negative and lower their estimation of the firm's value. Therefore, to avoid an unjustified

under-valuation, managers should be encouraged to voluntarily reveal all relevant

information. However, in practice, this is not the case,

Various explanations for this lack of full disclosure have been put forward. Investors

cannot determine whether managers have information; there will be no information

disclosure equilibrium. In such circumstances, managers are not motivated to reveal all

the information they have. It is however, that firms may retain some information

deliberately if its disclosure can cause a decrease in cash flows. Such costs are deemed to

be proprietary as outside parties may rely on a firm's proprietary information to inflict

damage or costs upon it (e.g., labor unions and competitors). Therefore, managers should

disclose only favorable information. Hence, investors do not know whether information

is being withheld because it is negative or because the costs likely to be incurred

following its disclosure are more important than the benefits of disclosure. In that

context, firms can withhold adverse information without its stock market value being

affected.

2. External sources of disclosure.

Rather than restricting themselves to firms' voluntary disclosure, investors can also fill

their information needs proactively by relying on financial analysts or by consulting

financial newspapers or other media. In addition, investors can also rely on other reliable

information sources, which scope and content are not under firms' control, e.g.,

disclosures mandated by legislators or regulators. However, since this approach requires

an investment of time, not all investors will resort to it, which can lead to an imbalance of

knowledge between investors. This imbalance can result in higher transaction costs,

lower trading volumes and fewer participants in the capital market. One of the

implications of this is that uninformed investors do not remain passive in the face of the

advantage held by informed investors

3. Mandatory corporate disclosure.

Here a firm is forced by some legislation to disclose its environment information to both

insiders and outsiders. Under this point, if a firm failed to disclose relevant information to

public, it will be held responsible, but this is only working in those countries whereby

environmental audit is compulsory.

- 6 -

of 16

TYPES OF ENVIROMENTAL AUDITS.

In general, there are two types of environmental audits: one focusing on the

Environmental compliance status and the other on the Environmental Management

System (EMS). The former audit is simply a check on how well companies comply with

the environmental regulations and the latter checks whether the company has a system to

achieve and maintain compliance.

Environmental compliance audit

To the extent that they have been involved in environmental audits, accountants seem to

have been involved mainly in environmental compliance audits. An environmental

compliance audit is a means of observing whether the company is meeting its objectives

at the time of the audit and whether improvements can be made. Its objectives are to

verify management systems and assure environmental compliance, identify compliance

program weaknesses and define liabilities, evaluate the compliance program in an

objective manner, and enhance communications.

Environmental Management System (EMS).

An EMS provides a framework to structure and develop an environmental policy. The

main advantage of an EMS audit is to make sure that the management system ensures

compliance in the future. Because such a system is important, the ISO 14000 standards

were introduced to provide an international standard for these audits. A part of ISO

14000, ISO 14011 deals with the audit of the EMS.

EMS is a systematic process of objectively obtaining and evaluating evidence to

determine the reliability of an assertion with regard to environmental aspects of

activities, events and conditions as to how they measure to established criteria, and

communicating the results to the client, to be specific, EMS would usually be found in

large companies. An EMS in small and medium sized enterprises is also possible,

although most of these companies would be faced with the problem of too few resources

A possibility for these companies to overcome this problem is by cooperating with other

companies and trying to realize benefits such as organizational and managerial efficiency,

continuous monitoring of compliance and improvement of the enterprise‟s image This

- 7 -

of 16

cooperation can consist of projects that enhance the spreading of information and

experience, thus resulting in savings of time and resources.

ADVANTAGES AND DISADVANTAGES

ADVANTAGES of Environmental audit.

1. There is a consensus that the major benefit of an environmental audit is the

subsequent reduction of the company‟s risk. By performing an environmental

audit, companies know which problems they could be facing. This enables

companies to create a competitive advantage if they understand their relation

with the environment

2. Some of the other benefits are the provision of management decision support

data, liability assurance, the creation of an additional measurement tool, better

compliance management, an aid in educating the employees, and a tool for

public relations and marketing.

The trade-off of these advantages and disadvantages will influence the decision of a

company as to whether an environmental audit will be conducted.

DISADVANTAGES of Environmental audit:

1. The cost of an environmental audit is clearly a negative aspect. The nature of an

environmental audit raises the question of who should bear the costs of the

collection and disclosure of environmental information: the company or the

stakeholders in whose interest the information is collected, and that the company

should bear the costs

2. The danger of disclosing environmental information to public is that, an

environmental audit can reveal violations of environmental rules that might affect

the company financially or can have negative consequences for its corporate

image

3. The audit might also disrupt the operations of the company, although proper

scheduling might mitigate this risk.

- 8 -

of 16

4. There is an increased risk of liability if the response to the audit is insufficient or

if the environmental audit reveals several problems simultaneously, which can

cause difficulties in setting priorities.

FACTORS INFLUENCING ENVIROMENTAL AUDITING.

1. Regulations: It is believed that, Environmental laws and regulations have

an impact on the environmental audit. Most of the time people do some

thing because there is certain law or regulation behind them other wise

they will not.

2. Costs: another element that can be expected to play deceive role is the

cost associated with an environmental review or audit. It is empirical

tested that, that costs used in evaluation of company‟s environmental

destructions did not known for sure whether the costs were recovered,

which may mean that other elements play a more important role in the

decision of the company to carry out an audit.

3. Incentive compensation: the impact of incentive compensation on the

significance managers give to environmental audits. Elliott and Patton

(1998) they developed an agency model of the link between an

environmental audit and the optimal wage structure. Their main idea is

that agents have to divide their efforts between two types of task: one type

focuses on the traditional profit generating activities, and the other on

environmental protection. This distinction is relevant to the monitoring

function, in the sense that the profit-generating activities can be monitored

easily whereas the effort to protect the environment is difficult to monitor.

This provides a rationale for having environmental auditing. They

conclude that the allocation of the effort depends on the relative accuracy

of the audit. The authors state that “if the results of environmental audits

are about as reliable as those from monitoring profit-seeking activities, the

agent would split his effort evenly between environmental and financial

tasks

- 9 -

of 16

4. Penalties: Existence of penalties in environmental audits is another strong

motive for a firm to conduct timely and completely environmental audit.

Mishra and others (1997) investigated penalties and the incentives for

companies to disclose information and to comply with regulations. To

verify compliance, a compliance audit is a logical tool. Mishra and

others (1997) concluded that the possibility of government agencies

accessing (voluntary) environmental reports did not have a negative

impact on the eagerness of companies to conduct an environmental

compliance audit despite the risk of „self-incrimination‟. With respect to

penalties in cases of violations of regulations, there is a distinction

between a conditional and an unconditional penalty structure. In a

conditional penalty structure, the effort to avoid environmental damage

and voluntary disclosure of such damage reduced the fine. Consequently a

conditional penalty structure had a positive influence on the willingness to

conduct compliance audits.

5. Geographical area: Some countries impose environmental reporting.

Examples include Spain, Denmark, The Netherlands, Norway, and

Sweden (Larrinaga and others 2002). The Danish type of report is similar

to an eco-balance sheet. In Spain companies are obliged to disclose

environmental information in the notes attached to financial statements.

Consequently, this information is audited as part of the audit of the

financial statements. This type of regulation extends the role of the

financial statement auditor to that of an auditor of environmental data,

although it remains unclear how these data are in fact audited and how

traditional auditing concepts such as materiality apply in this context.

BASIC STEPS IN AN ENVIRONMENTAL AUDIT.

There are three essential phases in carrying out an environmental audit. These

are

1. Planning,

2. Gathering information, and

3. Concluding the audit.

- 10 -

of 16

The planning of this type of audit is just as important an activity as planning a financial

audit. For example, it is essential that the correct people are selected to carry out the

audit. The actual work carried out will most probably include compliance as well as

substantive testing, and the auditor will be required to produce a report on the work

carried out. The types of activities involved at each of these three essential stages are:

Planning stage;

Identify the audit objectives (for example, is the purpose to check

compliance with management environmental control procedures, or to

identify inefficiencies in those procedures?)

Define the scope of audit (the whole company or only one specific sit?)

Determine who is the audience for the environmental audit (or example,

management, regulatory authorities, or the public)

Obtain all relevant background information

Determine the audit approach.

Ascertain, evaluate and document the relevant environmental systems and

controls operating.

Prepare a detailed audit programme.

Select the audit team on the basis of skills and experience.

An audit cannot be designed as a ready-made package to suit all circumstances. This

framework will help you in researching and developing an audit to suit your particular

needs.

* Identify the situation, or place, in which you will audit, e.g. the school grounds, the

home kitchen, the office.

* Select the area/s or issue/s that you will audit, e.g. waste management, energy, water or

biodiversity

* Identify key questions to focus your investigation within each issue, e.g. how do we

attempt to reduce and reuse products, and recycle waste?

* For each key question identify additional questions to investigate the issue in more

detail. The Enviro Facts listed below will provide background information to help you

identify appropriate and meaningful questions. In developing these questions it is useful

- 11 -

of 16

to consider the impacts of using a resource in your particular situation, and both before,

and after your situation, for example:

1. How much paper is used in the school?

2. What are the environmental effects of afforestation and paper mills?

3. What are the environmental effects of the waste paper?

* Work out remedial action, i.e. what can you do to improve the way in which resources

are used.

Issue Question Additional

questions

Enviro Facts to

assist

1. WASTE How do we attempt to

reduce and reuse

products, and recycle

waste?

Organic material, glass,

paper and card, plastic,

metals, liquids (e.g. toxic

wastes, oil).

War on waste; Pollution;

Marine pollution; Toxic

waste.

2.ENERGY How do we attempt to

reduce the amount of

energy used?

Heaters, lights, geysers,

stoves, transport

Global warming; Energy

options; Energy and the

environment;

Deforestation;

Desertification.

3. WATER

How do we attempt to

reduce the amount of

water used?

Hostel, kitchen,

bathrooms, school

grounds or gardens.

Pollution, riparian

vegetation, erosion.

Precious water; Wetlands;

River catchments;

Estuaries; Marine

pollution.

4.BIODIVERSITY How do we attempt to

increase biodiversity

in the grounds and

buildings?

Poisons used to kill pests,

the variety of habitats in

the school grounds,

encouraging animals to

come into the grounds,

use of indigenous plants

Gardening for wildlife;

Permaculture; Poisons in

the home and garden; Soil;

Soil erosion; Plant a tree

today; Indigenous, alien

and invasive; Traditional

medicine

Audit test:

Select the items to be tested.

Carry out detailed compliance and /or substantive testing.

Concluding.

Post-audit research and verification of the findings from the site visit.

Analysis of audit findings, identifying any deficiencies, discrepancies and

good performance practices.

- 12 -

of 16

Preparation of an audit report, outlining the objective and scope of the audit,

the methods employed a summary of the results, and an indication of action

areas.

The Environmental Audit Report

Role of the EA Report

The Environmental Audit Report or EA Report is a written record of the Environmental

Audit process. It describes the project or process being audited, lists the environmental

effects associated with that project or process, details the audit procedures that were

followed and identifies the relevant environmental legislation and standards that apply.

The role of the Environmental Audit Report is:

1. To provide an objective analysis of the environmental impacts arising from a

project or process.

2. To provide the information required to draw up a Comprehensive Mitigation Plan

in the event of there being any significant negative impacts on the environment.

Preparing an EA Report is a skilled task and it is unlikely that a project operator will be

able to prepare such a report to the standards required by the Environment Authority

without professional consultancy advice.

Form and Content of the EA Report

The form and content of an EA Report, as described below,

Form of the EA Report

The EA Report needs to communicate the relevant information clearly and concisely and

should therefore:

1. Be presented to make information accessible to the non-specialist, avoiding

technical terminology where possible.

2. Have information presented in summary tables and use good quality maps, charts,

Diagrams and other visual aids wherever possible.

3. Be clearly laid out with a clear table of contents, to allow the reader to find and

assimilate information easily and quickly.

4. Present information without bias and discuss issues with the emphasis appropriate

to their importance as in the overall context of the Environmental Audit.

- 13 -

of 16

Content of the EA Report

The EA Report should contain the following information:

1. Introduction The objectives and scope of the Environmental Audit.

2. Description of the Development or Activity Under Audit

The size and nature of the development or activity, a description of the relevant

management structures and workforce, a summary of all inputs and outputs, ancillary

operations such as transport and services, storage and processing operations.

3. Description of the Environment

A brief description of the surrounding including the natural and built environment, local

ecology (noting any sites of special interest or conservation value) and socio-economic or

cultural factors that may have a bearing on the audit.

4. Description of Environmental Effects

The term Effect is usually substituted in this context for the term Impact to reflect the fact

that an Environmental Audit is concerned with the effect of inefficient resource use and

processing as well environmental impacts arising from wastes and emissions.

Environmental effects related to the transport, handling, processing, storage and eventual

disposal route to the environment of all relevant inputs and outputs should be presented

systematically in a clear and appropriate manner.

They should include:

The environmental effects observed during the course of the audit.

The good and bad management practices that were observed during the course of

the audit, including the effectiveness of existing environmental mitigation

measures.

5. Conduct of the Audit

Those interviewed during the audit, the timing and audit methodologies used should be

presented.

- 14 -

of 16

6. Evaluation of Environmental Effects

The relevant environmental legislation and standards that apply must be defined. These

should be cross referenced to the environmental effects identified in 4. Description of

Environmental Effects. The environmental effects must be systematically evaluated and

ranked in terms of their significance and the assessments of significance justified.

7. Recommendations

The EA Report must make recommendations to address any significant negative

environmental effects and, importantly, allocate and justify priorities for action.

Recommendations should include the control and reduction of emissions by improved

efficiency, management and technical control measures. The emphasis should be on

incentive and removing the source of a problem rather than the use of command and

control or “end of pipe” technology.

The Comprehensive Mitigation Plan

The Comprehensive Mitigation Plan, or CMP, is an integral part of the EA Report to

which it refers. It is an important document as it is the CMP which presents how the

recommendations made in the EA Report are going to be implemented

HELPFUL GUIDELINES

Get support! Best results are achieved when the audit has wide support, and the changes

it recommends are backed by everyone involved. Get permission for the audit from the

relevant authorities; involve as many people as possible and share the results of the audit

widely.

Don't be disappointed: Most answers to the questions will probably be "No, we don't do

this" or "No, we haven't, not yet" - the purpose of auditing is to identify where

improvements can occur, not to pass or fail the institution concerned! If a great deal of

work needs to be done, don't be daunted. Everything cannot change overnight, and

change must be manageable, so pace yourself. The audit may lead to a two month, six

month, one year or five year plan

- 15 -

of 16

Review questions.

a) What is an environmental auditing? (5 marks)

b) What are the advantages and disadvantages of carrying out an environmental

auditing? (15 marks)

c) Just mention the basic factors influencing the environmental auditing. (10 marks)

(total marks=30) Thursday 17th

nov. 2005 test no. one

- 16 -

of 16

References:

1. Auditing and practice (second edition) by John Dunn.

2. Advanced auditing and investigation by F.M.H.Mhilu (NBAA study manual)

3. Auditing theory and practice by Hermanson, Loeb, Saada, and Strawser.

4. Auditing simplified by N.S. Saleemi

5. Auditing Questions and answers by Paul N. Manss’she.

6. Several internet sources

34894281 Enviromental Auditing

Documents

Transcript of 34894281 Enviromental Auditing