FRANK BADUA, PH.D. AMERICAN ACCOUNTING ASSOCIATION ANNUAL MEETING AUGUST 7, 2013 GREENING THE ACCOUTING CURRICULUM: HOW RESEARCH INTO THE NEXUS BETWEEN.

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FRANK BADUA, PH.D.AMERICAN ACCOUNTING ASSOCIATION ANNUAL MEETINGAUGUST 7, 2013

GREENING THE ACCOUTING CURRICULUM: HOW RESEARCH INTO THE NEXUS BETWEEN ACCOUNTING AND THE ENVIRONMENT CAN INFORM OUR PEDAGOGICAL EFFORTS

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Introduction• Business press and the academic literature have called

for increased participation by the accounting profession in the stewardship of the environment.

• Accordingly, there is a need for the accounting curriculum to promote environmental matters as part of the accountant’s expertise.

• While accountants are aware of this need, academics need to develop a comprehensive approach to raise student appreciation for green matters.

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Purpose• To identify, consolidate, and contextualize disparate research

efforts focused on accounting and the environment, but originating in different areas.

Accounting Information

Systems

Auditing

Business Law

Tax Accounting

Cost Accounting

Financial Accounting

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Purpose

• To provide an overview of research into accounting and the environment.

• To list concepts and issues that may serve as teaching

topics in specific accounting areas.

• To create a framework for an orderly, organized and mutually reinforcing system of embedded foci on accounting and the environment.

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Research Methodology• Research focused on articles published in peered reviewed

academic journals that study the relationship between accounting and the environment.

– Rutgerts Academic Research Database: Records the topical and methodogical characteristics of accounting research papers.

– Other web searches.

• Many papers analyzed the effect of management’s environmental disclosures, environmental regulation, or incidents related to the environment (e.g. oil spills) on various measures of financial performance such as stock price returns and bond or credit rating.

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Research Methodology

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Research MethodologyStudy Issues

De Villiers and Van Standen (2006)Hugues (2001)Illinitch (1998)Patten (1998)Patten and Trompeter (2003)

The relationship between environmental disclosure and its non-financial market determinants.

Roussey et. al. (1992)ISSAI (1992)Power (1997)INTONSAI (2004)

The application of auditing to environmental performance.

Reed et. al. (2008)Roman (2012)

The regulatory and tax implications of environmental initiatives.

Ogden (1995) The effects of the privatization of environmentally sensitive utilities.

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Research MethodologyAccounting Information

Systems

Auditing

Business Law

Tax Accounting

Cost Accounting

Financial Accounting How can these

research papers inform the

curriculum of the different

accounting areas?

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A Greener AIS Curriculum

• AIS, whether digital or manual, is intended to capture all decision critical and firm relevant information.

– AIS is relevant to the development of a greener accounting curriculum because much of the information by which a firm’s environmental friendliness is determined is measured in non-monetary and non-quantitative terms.

– This is especially true of Enterprise Resource Planning Systems (ERPS) which are esentially databases of all firm relevant information.

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A Greener AIS Curriculum – Relationship of ratings of firm financial performance with environmental

performance.– Environmental performance rating systems that use non-monetary

measures to evaluate a firm’s greenness such as:• Franklin Research and Development Corporation• Council of Economic Priorities• Investor Responsibility Research Center• Wiseman Scale

– Specific non-monetary measures of environmental performance:• Number of polluting incidents• Number of staff involved in environmental compliance audits

– Other non-quantitative criteria:• Whether a firm has a written policy committing to environmental

amelioration.• Whether there was any member of the Board of Directors charged

with environmental oversight.

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A Greener Auditing Curriculum• The traditional role of auditing has been to provide assurance as to

the veracity of financial statements and their conformity with GAAP.

• But there has been a call to apply the auditor’s expertise and skills to non-financial matters and, more ,to conduct environmental performance audits.

• There has been a call to develop environmental audit standards to govern the following types of audits:1. Financial Audits: Reporting entity has properly recognized, valued and

recorded environmental costs, liabilities and assets.2. Compliance Audits: Entity has conducted the environmentally relevant

activity in compliance with all applicable regulations.3. Performance Audits: Assess the validity of performance indicators used by

the entity in disclosures of environmental activities and whether these activities have been condcted in an effective, efficient and economical matter.

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A Greener Auditing Curriculum• Other research areas in auditing:

– How environmental issues can affect the audit function?

– Initiatives taken in the European Union with regards to environmental audits and the emergence of specific guidelines such as the Environmental Management Audit Standards.

– Standards intended to instruct government supreme audit institutions (SAIs) on how to conduct environmental audits.• When should the auditor rely on an environmental expert to support

his conclusions?

– Definition of the term ‘‘environmental asset’’: Benefit is not economic but pertains to aesthetic or health values and habitat, flood, and climate control. ISSAI (2004).

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A Greener Business Law Curriculum• Business law (BLAW) has continuosly evolved as an academic subject.

• Initially, BLAW courses focused on the Constitution, commercial law, partnership law, corporate law, and contract law.

• Today business schools offer a broad range of specialized and interdisciplinary courses including environmental law.

• Academic research has identified numerous federal statutes relevant to accounting and auditing including:– Clean Air Act– Clean Water Act– Resource Conservation and Recovery Act– Toxic Substances Control Act– Comprehensive Environmental Response Compensation and Liability Act– Superfund Amendment and Reauthorization Act

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A Greener Business Law Curriculum• Academic research has assessed compiance with environmental laws

based on the number of citations, fines and penalties imposed by pertinent government agencies.

• Also, some research has aggregated penalties imposed for violation of environmental laws as a measure of environmental capital expenditures.

• Today, academic research tends to focus on the disclosures for violations of environmental laws in the financial statements to ensure compliance with the Securities Act of 1933, the Securities Act of 1934, and the Sarbanes Oxley Act.– SEC Regulation S-K: Environmental disclosures required in reports

filed with the SEC.

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A Greener Tax Curriculum

• Most accounting students enroll in two tax courses: – A course in individual income taxation– A course in entity taxation

• The overall goal of these courses is to teach students to understand fundamental tax principles, apply basic tax planning concepts, and to be aware of the role of taxation in decision making and financial reporting.– Tax provisions often have a limited duration so the timing of transactions

is critical for businesses and individuals.– Effective use of environmental tax provisions requires planning and

coordination within the organization.

• Individuals and businesses have recognized that going green yields significant tax savings; therefore, tax courses represent a fertile ground for greening the accounting curriculum.

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A Greener Tax CurriculumExamples of Environmental Tax Provisions

Residential Energy EfficientProperty Credit

30% tax credit to individuals who acquire and install residential energy efficient equipment (e.g. solar hot water heaters, wind turbines)

Qualified Plug-In Electric Motor Vehicle

Tax credit to individuals ranging from $2,500 to $7,000 for certain new plug-in electric vehicles.

Fringe benefits to employees

--$20 per month exclusion for bicycle commuters with respect to reimbursements made by an employer to an employee to purchase, improve or restore a bicycle.--$100 per month exclusion for reimbursements made by employers to employees who rely on public transportation.

Energy-Efficient Commercial Business Deduction

Applies to businesses that improve performance of lighting, hot water systems, and business envelope.

Business Energy Investment Tax Credit

Applies to businesses that install qualifying property that generates power for their own use.

Bonus depreciation Applies to businesses that acquire qualified used and recycled property.

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A Greener Cost Accounting Curriculum

• Cost accounting data is gathered periodically and often compared against ideal or expected standards.

• Research has been conducted on the use of cost accounting data with respect to privatized state agencies involved in managing water supply, sewage disposal, and lacustrine and river maintenance.

• Research has also used data on emmissions of certain polluters by a business and its market value of equity.

• Pollution data such as the amount of waste produced by a business has been used as an environmental performance variable to explain envoronmental disclosure and performance.

• Cost accounting courses can easily relate these research initiatives to basic concepts such as standards and variances, non-financial performance measures, and responsibility centers.

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A Greener Financial Accounting Curriculum

• Main purpose of financial accounting is to provide information about the firm to external users who provide capital to the firm.

• However, information other than that found in the basic financial statements can affect the interests of investors and creditors. – This information is often found in the notes to the financial

statements.– Research concludes that information pertaining to

environmental performance is relevant to the value of the firm.

– There has been a significant growth in socially responsible and environmentally friendly investment and mutual funds .

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A Greener Financial Accounting Curriculum

• Financial accounting concepts may be easily explained by reference to environmental concerns. Some of these concepts include:– Management Discussion & Analysis

– Contingent Liabilities

– Footnote disclosures

– Value Relevance

– The nature and scope of annual reports

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Conclusion: Not Missing the Forest for the Trees

• Without proper effort, individual efforts at environmental discussion by instructors in separate courses is analogous to lonely trees unable to cross-pollinate.

• To guide efforts at an integrated accounting curriculum intended to foster awareness of environmental matters, prior literature from management information systems (MIS) was consulted.– MIS is an academic major that integrates subjects from

different areas.

• In addition to MIS, learning models from the education field were consulted.

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Conclusion: Not Missing the Forest for the Trees

Capstone Course

Single Course

Nested ModelS

Shared Model

Sequenced Model

Connected Model

Each of these models can be adapted to achieve the task of greening the accounting curriculum.

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Questions…

Contact Information: Frank Badua, Ph.D. Associate Professor of Accounting Lamar University Email: [email protected] Phone: (409) 880-8649