Environmental reporting: Toward enhanced information quality

Managers and stakeholders are increasingly aware of the importance of the environmental impact of a firm's operations when assessing risk and attempting to determine future profitability. Unfortunately, financial accounting systems often fail to fully disclose these environmentally-related costs. The reasons underlying this incomplete disclosure are myriad, ranging from measurement issues to the structure of the firm's chart of accounts. In many ways, the issues facing managers and stakeholders who are attempting to assess environmental costs arising from business operations resemble the issues faced when attempting to determine the costs of producing poor quality products. The negative impact on the environment from business operations can be viewed as a failure in the same way that the negative impact of producing a defective product can be seen as a production control failure. Similarly, costs are incurred to prevent and detect environmental failures, and the cost of failure—particularly if not addressed within the firm—can be huge and unknowable. Drawing on the experiences of firms employing quality measures and reporting, this article presents an environmental cost reporting model to provide greater transparency on environmental impact of business operations to managers and firm stakeholders.