Green accounting: Uncertainty over mandatory greenhouse gas and energy reporting is no excuse for inaction, says Henry Fernandez
Five steps to a green accounting plan
Perhaps not surprisingly, many of the 700 or so Australian companies subject to mandatory greenhouse gas and energy reporting (NGER) thresholds under the National Greenhouse and Energy Reporting Act still appear to be undecided as to how they can best adapt processes and systems to meet their reporting obligations.
A lack of detail in terms of the workings of the Australian Emissions Trading Scheme (scheduled to commence in 2010) and delays over the formulation of appropriate accounting standards have added to the cause of those urging a cautious 'wait and see' approach.
This uncertainty however, is not a valid reason for inaction. The detailed requirements, published in support of NGER, provide more than sufficient detail for businesses to plan and execute an effective response. And this can be achieved without a large investment in systems or processes.
In formulating this response, the apparent non-financial nature of this reporting has meant that many organisations risk overlooking the benefits of using existing accounting systems as a core component of the NGER solution. Traditional organisational structures, with 'fault-lines' between environmental and financial reporting hierarchies, often mean that the accountants are not even being engaged in the discussion.
In the meantime, however, a cursory look at the key reporting principles of the Act will resonate loudly with accounting professionals who will see many close parallels with attributes and entities inherent in any accounting system that produces a 'true and fair' set of financial statements. This realisation should motivate the accounting professional to engage those parts of the organisation nominally responsible for environmental reporting.
The NGER principles of transparency, comparability, accuracy, completeness and consistency map quite neatly to accounting system concepts, such as transactional verifiability, security, reconcilability, user attribution and time period consistency. It could even be argued that these principles compel organisations to seriously investigate the appropriateness of using their accounting systems as a source of data for NGER.
It is not just the reporting principles themselves that encourage use of the accounting system to construct the 'NGER ledger'. Organisational constructs in the legislation such as 'facility' and 'corporation' and the treatment of joint ventures and partnerships are easily transferable to the way an organisation reflects both its legal and management organisational structures in a systems context.
Furthermore, for organisations with significant amounts of emissions from sources consumed by their manufacturing process (Scope 1 emissions), the possibilities are even more exciting.
The cost accounting system with its focus on inputs, conversion factors and outputs is a ready source of quantity-based data. These inputs, such as energy, raw materials, feed and additives, as well as the outputs in terms of product and by-products are often expressed in quantity terms such as megawatt hours, gigajoules, litres, tonnes and cubic metres.
Accountants are often surprised to learn that the data transformation process for NGER applies a process similar to product conversion algorithms. So, for example, megawatt hours of electricity are converted to tonnes of carbon dioxide using accepted conversion factors.
Auditing processes are streamlined by having a single data source servicing multiple end uses. Thus a gas consumption invoice would, at data-entry time, update both the payables ledger and the NGER ledger. The financial ledger and the NGER ledger would in effect have a common reconciliation source. In this model, improvements in measurement and data-capture systems have the compound benefit of improving both financial, costing and NGER outcomes.
So where to start? By adopting a simple five-step approach to solution development, an organisation can quickly evaluate the status of their existing system, determine the gaps and then evaluate the possible options from a more informed basis.
Practical application of this approach will inevitability raise some challenges. The chart of accounts, for example, will need to be reviewed in the light of NGER requirements. Transactional quantity capture may require process retraining in areas such as invoice processing and may also require system reconfiguration. Integration will be required with sub-ledgers holding data such as bills of material.
A recalibration will be required across processes and systems that were implemented in the days prior to NGER.
Looking ahead to 2010 and the commencement of the Australian Emissions Trading Scheme, positioning the accounting system at the centre of the NGER solution now should enable organisations to close the loop between the quantity NGER ledger and the financial statements taking account of the carbon-pricing model and the accounting treatment of permits and exposures.
In summary, there are five reasons why your accounting system should be at the core of your NGER solution.
These are:
NGER principles of transparency, comparability, accuracy, consistency, and completeness are all attributes of a healthy accounting system
enriching the existing accounting data for the purpose of NGER may lead to improvements in the accuracy of costing and financial information
organisational structures in finance and costing can be mapped to NGER structures of corporate and facility
accounting systems will inevitably have to reflect the financial obligations that arise from the pricing of carbon under the Australian Emissions Trading Scheme
organisations will want a single source of 'the truth' for financial and non-financial data
This is a discussion the accounting professional and the environmental professional should be having now.
Henry Fernandez is innovations director of PLAUT. He has more than 20 years' experience in systems consulting, including global integration for BHP Billiton, and was a finance systems architect for BHP Steel.
