related documents
RR73 - Full Cost Accounting - An Agenda for Action
ACCA Research Report No. 73
This research report seeks to provide guidance on how the accountancy profession may begin to address the issue of how, if at all, it could be part of the development of some form of full cost accounting (hereafter FCA). The policy impetus for FCA comes from the call, buried within the detail of the European Commission's Fifth Action Programme (subtitled Towards Sustainability), for the accountancy profession to develop FCA so that 'the consumption and use of environmental resources are accounted for as part of the full cost of production and reflected in market prices' (European Commission, 1992, Vol.II, p.67)1.
With very few exceptions (see, for example, Bebbington and Thomson, 1996)2 the European Commission's call for FCA has largely been ignored by the accountancy profession. At the same time, however, the practice of FCA has slowly been developing over the past decade, primarily within corporations (nine FCA experiments are reviewed in detail in chapter 5 of the report). The report draws together insights from these experiments as well as from 50 interviews with individuals who have experience of developing FCA, have a policy-related interest in the development of FCA, or are members of the accountancy profession involved in policy matters. In addition, the report includes data from a postal survey of European accountancy bodies in which the impediments to the profession's development of FCA were examined.
Arguably, the key element of any FCA exercise may be a concern with the externalities that arise from particular products or processes or from the activities of all or part of an organisation. Externalities have been defined as arising 'when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted for by the first group' (European Commission, 1995, Vol.II, p.413)3. While the European Commission stated that it was concerned with environmental externalities, social externalities are also relevant to the FCA debate. While noting this, the report concentrates on FCA for environmental externalities and only considers social externalities in its conclusions.
FCA is, therefore, an accounting tool that seeks to identify all external environmental costs (and benefits) associated with a particular activity and to incorporate this information in decision-making processes. The assumption underlying the desire for FCA is that if one were to account for externalities then society could be better informed as to which decisions would be more likely to make sustainable development achievable. (This point is developed in depth within chapter 1 of the report and will not be revisited here.)
Before moving onto a summary of the report's conclusions, one point needs to be made. We have experienced (and have attempted to resolve) serious tensions in writing this report. On the one hand, the results of a FCA exercise can be considered from a 'business as usual' orientation. If one takes this view then there are sound reasons for business to develop FCA and there are positive benefits from undertaking the exercise. On the other hand, if FCA is taken to its logical conclusion then it is possible to conclude that current business activities are unsustainable and as a result one needs to rethink Western style capitalism completely. The second set of 'stories' that emerge from FCA are less acceptable to business but nevertheless constitute a defensible set of conclusions. We know, however, that business is not about (and, indeed, is not able) to write itself out of existence. The report, therefore, seeks to tread a fine line between being overly positive about the potential of FCA to move us towards sustainable development and being overly pessimistic about the distance still to be travelled if we are to move away from unsustainability. We are not entirely sure if we have successfully balanced the two competing sets of tensions. We hope, however, that readers will recognise that these tensions do exist, will try to understand their source and will bear with us as we seek to articulate both the positive and negative aspects of FCA.
A number of points are developed on the basis of the research. These can be summarised as follows.
It is possible to undertake FCA, and four generic steps are necessary for each exercise.
These are:
(i) define the object of the FCA exercise (be it a product, process, a part or whole of an organisation)
(ii) determine the scope of the FCA exercise (that is, where the boundary of the analysis will be)
(iii) identify and measure external impacts in physical terms and
(iv) monetise the external impacts.
None of these steps is easy to do and a great deal of judgement will be exercised at each stage. In addition, the decisions taken at each one of the four stages will have a potentially significant impact on the conclusions that can be drawn from the FCA exercise.
While at some levels FCA appears to be conceptually relatively straightforward, it is not an easy technique to develop and use in practice. In particular, FCA requires substantial amounts of physical data about the object of the exercise and requires extensive modelling of complex real world relationships. The data required for FCA is usually only available in organisations that are at the forefront in responding to the environmental agenda. Indeed, it has taken organisations anything up to three years to generate the physical data necessary for FCA. The main conceptual issue that arises with FCA is deciding how to monetise externalities. Moreover, different approaches to monetisation may often result in different conclusions being drawn from an FCA exercise.
The results of FCA calculations suggest that corporate activities are not currently sustainable. It appears that significant social and environmental costs are presently being externalised by corporations. How one moves from this unsustainable state is not clear, as there are structural impediments to making such a transition (particularly in the areas of energy and transportation). In addition, there is much to be gained and lost by individual businesses and by business collectively if such a transition is to be made.
FCA highlights that some externalities can be eliminated by the redesign of production processes or by organisations operating differently. Thus, the strategic planning related benefits of undertaking FCA are deemed to be significant and this is the area in which the business case for FCA gains ground. This is especially the case for industries where externalities are likely to be imposed via some form of regulation in the future (for example, by way of a carbon tax, a requirement to take back a product at the end of its life or more stringent environmental standards) or where plant operating lives are such that consideration of future costs will yield benefits. Many interviewees had the expectation that in the future costs that are presently external will become internalised. If one could identify those costs now, then actions could be taken to ensure that future cost exposure is minimised.
Nonetheless, some political issues arise from FCA. In particular, it appeared to us that FCA has the potential to connect external costs with particular organisations and to make these, otherwise invisible, costs visible. Where both the existence of the external costs, and the link between those costs and the organisation, are not otherwise known, there is a possibility that FCA may create a perception of responsibilities that would not otherwise exist. Thus, FCA redefines the boundaries of organisations and organisational responsibilities. This aspect of FCA may account for the relatively low level of FCA experiments which have been made public as FCA, at least potentially, threatens the legitimacy of business.
Finally, the accountancy profession is not involved in the development of FCA at present. A lack of engagement with FCA is due, in part, to a high level of ignorance about the technique but we also suggest that there are political impediments to the profession's involvement in this area. In particular, from a review of how policy making in the profession is assumed to evolve we would suggest that there has been insufficient demand for the profession to act in this area. Further, until there is a requirement (from, for example, the government) for the profession to champion FCA and/or until the profession's 'clients' (that is, industry itself) demand that accountants help them develop FCA, then this lack of engagement with FCA is likely to continue. Experimentation in FCA, however, will continue and the profession risks being left behind in an area to which, potentially, it has much to contribute.
In addition, we make a number of recommendations in the research report as to how the European Commission's call for the accountancy profession to develop FCA could be taken forward. In particular our 'agenda for action' contains the following recommendations:
(1) Externalities data should be made more widely available.
Data on externalities should be brought into the public domain in some manner. While FCA is one way to do this, the systematic provision of such data would be a valuable starting point (especially in the absence of a fully agreed FCA approach). There are various ways in which data on externalities in could be made available. For example, some form of eco-labelling is a useful technique for identifying externalities at the level of a particular product. In addition, comprehensive mandatory environmental and social reporting by corporations (at least along the lines envisioned by the Company Law Reform Recommendations) could bring this data into the public domain. Its provision in reporting could be relatively simply implemented (especially in the United Kingdom, where there is a long history of voluntary reporting). The types of information which one would expect to see from each organisation (focusing on environmental externalities) would be an eco-balance of the activities undertaken, the resource use and pollution impacts associated with these activities and the ecological footprint of the organisation as a result. While reporting is one way forward, there is still a need to develop FCA and the steps required to do this form the basis for the rest of our recommendations.
(2) A more robust and more widely accepted approach to FCA should be developed.
Such an approach should draw on knowledge from the FCA experiments that have already been developed. At the moment, the knowledge from these experiments is not concentrated in one place. There would be much to be gained from bringing together those involved in FCA experiments to develop an accepted FCA approach. Such an approach would need to be tested and evaluated (see recommendation (3) below) and the results should be disseminated (see recommendation (4) below). We envisage that how to account for social externalities should also be considered.
(3) Field testing and experimentation must be carried out.
Once an accepted and more robust FCA approach is developed then the proposed approach should be tested by applying it to a number of specific situations in the field so that any problems with FCA implementation could be identified and resolved. This step would also help determine with more certainty if FCA is an appropriate tool to assist business in its pursuit of sustainable development and to enable various stakeholders to understand the externalities of various activities. In addition, the development of an agreed approach may itself encourage more widespread experimentation.
(4) An education and practical guidance programme must be developed.
There is a need for education in the area of FCA. Our investigations found a lack of knowledge of FCA in both the accountancy profession and within business circles as well. At the same time, we also note that FCA is a potentially powerful tool in a transition towards a more sustainable economy. As a result, we would recommend that the idea of FCA and an approach to it be more widely promoted and disseminated among the accountancy and business community. Such a move, combined with guidance on how to undertake FCA (recommendation 2) and further co-ordinated experimentation with such a FCA approach (recommendation 3) would help create an environment within which FCA could flourish.
The above recommendations require specific mechanisms to ensure they are achieved. In particular, four groups should be involved in the implementation of our recommendations: governments (at both the national, European and international level), the accountancy profession, business (in terms of individual corporations as well as industry groups) and non-governmental organisations. The most obvious body to assist in the further development of FCA within Europe (in the sense outlined in recommendations 2 and 3) would appear to be a European Union institution of some kind. The European Environment Agency, for example, has been developing assessments of the externalities arising from electricity production and from transportation and therefore may be a suitable organisation to foster the development and experimentation of more coherent FCA. Such a sentiment, however, does not imply that a European Union body must develop FCA on its own. We would suggest that, with adequate resources, a group of 'experts' from relevant disciplines and with appropriate experience could develop (as laid out in recommendations 2 and 3 above) a coherent framework for developing FCA and for evaluating the information which is generated as a result. The European Commission is unlikely to be the only body interested in the 'findings' of such a group. International governments (especially at the likes of Rio+10 and Agenda 21 bodies) national governments (and bodies such as the UK Commission on Sustainable Development), industry associations, the accountancy profession (both in the UK and more widely), business in general and individual corporations would also benefit from the work of such a group. The funding of any such collaborative and multi-disciplinary group should probably be split between these interested bodies.
The resolution of the specific details of how to conduct FCA, what FCA could yield with respect to insights into corporate activities and how FCA should be used within a policy framework is some way off. It is clear, however, that FCA offers considerable promise as a tool to enable society to better understand the linkages between economic activity and the pursuit of sustainable development. It is, therefore, important that this report's consideration of FCA is not seen as some issue of marginal interest to society and the accounting profession. FCA drives to the core of what we currently do and questions the efficacy of those activities.
Endnotes
1 European Commission, (1992). The Fifth Action Programme, 23 final – Vol. I-III, Brussels, 27 March 1992.
2 Bebbington, Jan and Thomson, Ian (1996). Business Conceptions of Sustainability and the Implications for Accountancy, Association of Chartered Certified Accountants, London.
3 European Commission (1995). ExternE: Externalities of Energy, Vols. 1-6, European Commission, Brussels.
Bebbington, Gray, Hibbitt and Kirk, 2001
Executive summary
This research report seeks to provide guidance on how the accountancy profession may begin to address the issue of how, if at all, it could be part of the development of some form of full cost accounting (hereafter FCA). The policy impetus for FCA comes from the call, buried within the detail of the European Commission's Fifth Action Programme (subtitled Towards Sustainability), for the accountancy profession to develop FCA so that 'the consumption and use of environmental resources are accounted for as part of the full cost of production and reflected in market prices' (European Commission, 1992, Vol.II, p.67)1.
With very few exceptions (see, for example, Bebbington and Thomson, 1996)2 the European Commission's call for FCA has largely been ignored by the accountancy profession. At the same time, however, the practice of FCA has slowly been developing over the past decade, primarily within corporations (nine FCA experiments are reviewed in detail in chapter 5 of the report). The report draws together insights from these experiments as well as from 50 interviews with individuals who have experience of developing FCA, have a policy-related interest in the development of FCA, or are members of the accountancy profession involved in policy matters. In addition, the report includes data from a postal survey of European accountancy bodies in which the impediments to the profession's development of FCA were examined.
Arguably, the key element of any FCA exercise may be a concern with the externalities that arise from particular products or processes or from the activities of all or part of an organisation. Externalities have been defined as arising 'when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted for by the first group' (European Commission, 1995, Vol.II, p.413)3. While the European Commission stated that it was concerned with environmental externalities, social externalities are also relevant to the FCA debate. While noting this, the report concentrates on FCA for environmental externalities and only considers social externalities in its conclusions.
FCA is, therefore, an accounting tool that seeks to identify all external environmental costs (and benefits) associated with a particular activity and to incorporate this information in decision-making processes. The assumption underlying the desire for FCA is that if one were to account for externalities then society could be better informed as to which decisions would be more likely to make sustainable development achievable. (This point is developed in depth within chapter 1 of the report and will not be revisited here.)
Before moving onto a summary of the report's conclusions, one point needs to be made. We have experienced (and have attempted to resolve) serious tensions in writing this report. On the one hand, the results of a FCA exercise can be considered from a 'business as usual' orientation. If one takes this view then there are sound reasons for business to develop FCA and there are positive benefits from undertaking the exercise. On the other hand, if FCA is taken to its logical conclusion then it is possible to conclude that current business activities are unsustainable and as a result one needs to rethink Western style capitalism completely. The second set of 'stories' that emerge from FCA are less acceptable to business but nevertheless constitute a defensible set of conclusions. We know, however, that business is not about (and, indeed, is not able) to write itself out of existence. The report, therefore, seeks to tread a fine line between being overly positive about the potential of FCA to move us towards sustainable development and being overly pessimistic about the distance still to be travelled if we are to move away from unsustainability. We are not entirely sure if we have successfully balanced the two competing sets of tensions. We hope, however, that readers will recognise that these tensions do exist, will try to understand their source and will bear with us as we seek to articulate both the positive and negative aspects of FCA.
A number of points are developed on the basis of the research. These can be summarised as follows.
It is possible to undertake FCA, and four generic steps are necessary for each exercise.
These are:
(i) define the object of the FCA exercise (be it a product, process, a part or whole of an organisation)
(ii) determine the scope of the FCA exercise (that is, where the boundary of the analysis will be)
(iii) identify and measure external impacts in physical terms and
(iv) monetise the external impacts.
None of these steps is easy to do and a great deal of judgement will be exercised at each stage. In addition, the decisions taken at each one of the four stages will have a potentially significant impact on the conclusions that can be drawn from the FCA exercise.
While at some levels FCA appears to be conceptually relatively straightforward, it is not an easy technique to develop and use in practice. In particular, FCA requires substantial amounts of physical data about the object of the exercise and requires extensive modelling of complex real world relationships. The data required for FCA is usually only available in organisations that are at the forefront in responding to the environmental agenda. Indeed, it has taken organisations anything up to three years to generate the physical data necessary for FCA. The main conceptual issue that arises with FCA is deciding how to monetise externalities. Moreover, different approaches to monetisation may often result in different conclusions being drawn from an FCA exercise.
The results of FCA calculations suggest that corporate activities are not currently sustainable. It appears that significant social and environmental costs are presently being externalised by corporations. How one moves from this unsustainable state is not clear, as there are structural impediments to making such a transition (particularly in the areas of energy and transportation). In addition, there is much to be gained and lost by individual businesses and by business collectively if such a transition is to be made.
FCA highlights that some externalities can be eliminated by the redesign of production processes or by organisations operating differently. Thus, the strategic planning related benefits of undertaking FCA are deemed to be significant and this is the area in which the business case for FCA gains ground. This is especially the case for industries where externalities are likely to be imposed via some form of regulation in the future (for example, by way of a carbon tax, a requirement to take back a product at the end of its life or more stringent environmental standards) or where plant operating lives are such that consideration of future costs will yield benefits. Many interviewees had the expectation that in the future costs that are presently external will become internalised. If one could identify those costs now, then actions could be taken to ensure that future cost exposure is minimised.
Nonetheless, some political issues arise from FCA. In particular, it appeared to us that FCA has the potential to connect external costs with particular organisations and to make these, otherwise invisible, costs visible. Where both the existence of the external costs, and the link between those costs and the organisation, are not otherwise known, there is a possibility that FCA may create a perception of responsibilities that would not otherwise exist. Thus, FCA redefines the boundaries of organisations and organisational responsibilities. This aspect of FCA may account for the relatively low level of FCA experiments which have been made public as FCA, at least potentially, threatens the legitimacy of business.
Finally, the accountancy profession is not involved in the development of FCA at present. A lack of engagement with FCA is due, in part, to a high level of ignorance about the technique but we also suggest that there are political impediments to the profession's involvement in this area. In particular, from a review of how policy making in the profession is assumed to evolve we would suggest that there has been insufficient demand for the profession to act in this area. Further, until there is a requirement (from, for example, the government) for the profession to champion FCA and/or until the profession's 'clients' (that is, industry itself) demand that accountants help them develop FCA, then this lack of engagement with FCA is likely to continue. Experimentation in FCA, however, will continue and the profession risks being left behind in an area to which, potentially, it has much to contribute.
In addition, we make a number of recommendations in the research report as to how the European Commission's call for the accountancy profession to develop FCA could be taken forward. In particular our 'agenda for action' contains the following recommendations:
(1) Externalities data should be made more widely available.
Data on externalities should be brought into the public domain in some manner. While FCA is one way to do this, the systematic provision of such data would be a valuable starting point (especially in the absence of a fully agreed FCA approach). There are various ways in which data on externalities in could be made available. For example, some form of eco-labelling is a useful technique for identifying externalities at the level of a particular product. In addition, comprehensive mandatory environmental and social reporting by corporations (at least along the lines envisioned by the Company Law Reform Recommendations) could bring this data into the public domain. Its provision in reporting could be relatively simply implemented (especially in the United Kingdom, where there is a long history of voluntary reporting). The types of information which one would expect to see from each organisation (focusing on environmental externalities) would be an eco-balance of the activities undertaken, the resource use and pollution impacts associated with these activities and the ecological footprint of the organisation as a result. While reporting is one way forward, there is still a need to develop FCA and the steps required to do this form the basis for the rest of our recommendations.
(2) A more robust and more widely accepted approach to FCA should be developed.
Such an approach should draw on knowledge from the FCA experiments that have already been developed. At the moment, the knowledge from these experiments is not concentrated in one place. There would be much to be gained from bringing together those involved in FCA experiments to develop an accepted FCA approach. Such an approach would need to be tested and evaluated (see recommendation (3) below) and the results should be disseminated (see recommendation (4) below). We envisage that how to account for social externalities should also be considered.
(3) Field testing and experimentation must be carried out.
Once an accepted and more robust FCA approach is developed then the proposed approach should be tested by applying it to a number of specific situations in the field so that any problems with FCA implementation could be identified and resolved. This step would also help determine with more certainty if FCA is an appropriate tool to assist business in its pursuit of sustainable development and to enable various stakeholders to understand the externalities of various activities. In addition, the development of an agreed approach may itself encourage more widespread experimentation.
(4) An education and practical guidance programme must be developed.
There is a need for education in the area of FCA. Our investigations found a lack of knowledge of FCA in both the accountancy profession and within business circles as well. At the same time, we also note that FCA is a potentially powerful tool in a transition towards a more sustainable economy. As a result, we would recommend that the idea of FCA and an approach to it be more widely promoted and disseminated among the accountancy and business community. Such a move, combined with guidance on how to undertake FCA (recommendation 2) and further co-ordinated experimentation with such a FCA approach (recommendation 3) would help create an environment within which FCA could flourish.
The above recommendations require specific mechanisms to ensure they are achieved. In particular, four groups should be involved in the implementation of our recommendations: governments (at both the national, European and international level), the accountancy profession, business (in terms of individual corporations as well as industry groups) and non-governmental organisations. The most obvious body to assist in the further development of FCA within Europe (in the sense outlined in recommendations 2 and 3) would appear to be a European Union institution of some kind. The European Environment Agency, for example, has been developing assessments of the externalities arising from electricity production and from transportation and therefore may be a suitable organisation to foster the development and experimentation of more coherent FCA. Such a sentiment, however, does not imply that a European Union body must develop FCA on its own. We would suggest that, with adequate resources, a group of 'experts' from relevant disciplines and with appropriate experience could develop (as laid out in recommendations 2 and 3 above) a coherent framework for developing FCA and for evaluating the information which is generated as a result. The European Commission is unlikely to be the only body interested in the 'findings' of such a group. International governments (especially at the likes of Rio+10 and Agenda 21 bodies) national governments (and bodies such as the UK Commission on Sustainable Development), industry associations, the accountancy profession (both in the UK and more widely), business in general and individual corporations would also benefit from the work of such a group. The funding of any such collaborative and multi-disciplinary group should probably be split between these interested bodies.
The resolution of the specific details of how to conduct FCA, what FCA could yield with respect to insights into corporate activities and how FCA should be used within a policy framework is some way off. It is clear, however, that FCA offers considerable promise as a tool to enable society to better understand the linkages between economic activity and the pursuit of sustainable development. It is, therefore, important that this report's consideration of FCA is not seen as some issue of marginal interest to society and the accounting profession. FCA drives to the core of what we currently do and questions the efficacy of those activities.
Endnotes
1 European Commission, (1992). The Fifth Action Programme, 23 final – Vol. I-III, Brussels, 27 March 1992.
2 Bebbington, Jan and Thomson, Ian (1996). Business Conceptions of Sustainability and the Implications for Accountancy, Association of Chartered Certified Accountants, London.
3 European Commission (1995). ExternE: Externalities of Energy, Vols. 1-6, European Commission, Brussels.