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ENVIRONMENTAL ACCOUNTING PRACTICES BY SHARIAH-COMPLIANT COMPANIES IN MALAYSIA
Avylin Roziana Mohd Ariffin1 Junaidah Abu Seman2
1Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM)
2Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM)
Accepted date: 17-7-2019 Published date: 31-12-2019
To cite this document: Avylin, M.A & Junaidah, A.S (2019). Environmental Accounting Practices by Shariah-compliant Companies in Malaysia. International Journal of Accounting, Finance and Business (IJAFB), 4(24), 109-115.
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Abstract: Islamic law cannot be assumed to be associated only with the worship and morality, but it offers instruction for various facets of human existence. Environmental concerns like global warming and preservation and protection of a healthy environment is among the things highlighted in Shariah. As environmental accounting is an approach that significantly mitigate the adverse environmental consequences from business activities, the practice is supposedly be implemented by all business firms, especially by the Shariah-compliant companies that are expected to embed Islamic values in its operation. This paper is therefore interested in extending the focus of environmental accounting practice in Shariah-compliant companies in environmentally sensitive industries. In addition to that, this paper also looks at the support by the top management of these companies regarding environmental issues and how this may affect the adoption of the environmental accounting practices among them.
Keywords: Environmental Accounting, Environmental and Islamic law, Shariah and the environment
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Introduction
Environmental issues are among the subjects that demand corporate scrutiny nowadays as societies are beginning to be made aware of the adverse environmental impacts that could be caused by business activities (Jones, 2010). This mounting awareness has stimulated debate on the importance of corporate environmental performance, and companies are beginning to realize that it is important to place sustainable development on their business agenda and to act accordingly. Customers and other stakeholders have responded to environmental disasters by demanding greater corporate social responsibility (CSR), and this influences their purchasing and investment decisions (Maignan, 2001; Mohr, Webb & Harris, 2001; Ritter, Borchardt, Vaccaro, Pereira & Almeida, 2014). Using a worldwide sample of public consumers, Dawkins and Lewis (2003) demonstrate that consumers’ views have changed over time from an emphasis on “value for money” in the past, to a consideration of “ethical and environmental responsibility” in recent years, with a demand for low-pollution and energy-efficient products
Journal website: www.ijafb.com
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(Porter & van der Linde, 1995a). Similarly, shareholders are increasingly attracted to companies employing eco-efficient business strategies, raising the firm’s value (Cormier, Magnan &
Morard, 1993; Jaggi & Freedman, 1992; Mahoney & Roberts, 2007; Sinkin, Wright & Burnett, 2008). The increasing environmental consciousness has further created the need for environmental protection efforts to be taken by firms, such as the need for “sustainability”1, waste minimisation, pollution prevention, energy conservation and other health and safety related strategies (Hui, Chan & Pun, 2001). Paralleling this development, Environmental Accounting is expanding to meet the need to measure environmental performance and support Environmental Management Systems (EMS).
People tend to look at the environmental concerns as a contemporary and worldly issue, not as a religious one. However, such concerns are actually part of mandatory religious duty for every Muslim. The importance of the issues of the environment is not alien in Islam. As God said in Al-Qasas 28:77,
Be good, even as God has been good to you, and do not pursue corruption in the Earth.
Verily God does not love corrupters
and in Al-A’raf 7:56,
And do not cause corruption in the earth, when it has been set in order.
The above verses prove that any damage to the environment is considered to be a kind of corruption which is forbidden in Islam. For this reason, everybody must play roles in preserving the Earth. Especially the business, whose activity clearly impacting sustainability, it is critical for them to engage with environmental management, including to practice environmental accounting. The present study is timely in providing a picture of the environmental accounting practice among companies in Malaysia so that we can identify whether they are in line with the Islamic law, and further to suggest how we can move towards it.
The next section provides a brief discussion on the connection between Islamic law and the issues of environment. The section is followed by an explanation of the research method employed in this study and the analysis of the result in detail. Conclusion is presented in the last section.
Islamic Law and the Environment
Islamic law is not only associated with the worship and morality, rather it prescribes directive for various facets of human existence, including the concerns of global warming, environmental crisis and preservation and protection of a healthy environment (Deuraseh, 2012). The application of the Islamic law must lead to the happiness, peace, prosperity, progress, glory and fraternity of the society, and therefore, to meet such objective in the era of modern and globalization, Maqasid al Shariah must also protect one of the essential values of al-daririyyat, namely the environment. As been stated in Deuraseh (2012, p. 109),
1 Sustainability is defined as policies and strategies that meet society’s present needs without compromising the ability of future generations to meet their own needs. This definition is given by US EPA. Please check http://epa.gov/sustainability/basicinfo.htm
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The Shari‘ah is not only contribute in the growth of a civilization, but also, it has its place in the “preservation of a healthy environment”, to safeguard human beings from spiritual and physical afflictions. The various rules and injunctions of the Shari‘ah concerning such affairs as ritual cleanliness, food and drinks, dietary, work habits, the organization of the environment are all ordered by Allah (s.w.t) for the purpose that humanity and society can preserve and maintain a healthy environment.
Unfortunately, in the pursuit of country’s prosperity and growth, the negative impacts arising from industrial activities has led to further problems that threaten human lives and the natural habitat. For example, The Deepwater Horizon BP oil spill in the Gulf of Mexico released estimated 4.9 million barrels of crude oil into the ocean, which has caused extensive damage to marine and wildlife habitats, as well as killing the fishing and tourism industries. In the South- East Asian region particularly, the haze hazard that hit Malaysia in June 2013, as a result of forest fires caused by the cleaning operation by oil palm plantation companies in Indonesia, impacting hazardous air pollution index (API) to the countries, causing various health problems including death. These are only few examples out of many more cases of industrial disasters that contribute towards land, air and water pollution that will further lead to many negative issues such as disease, death and global warming. This is clearly conflicting with the Shariah since environmental degradation is one of the major problems that can threaten the five necessities (al-daruriyah al-khamsa), as what been claimed by Islam. Therefore, it has become necessary for business firms to seriously consider various approaches to measuring and ultimately reducing these negative environmental impacts. This situation signifies a critical need for Environmental Accounting (EA) studies to be conducted in developing nations, especially as environmental issues are always associated with industrialization and economic growth (Xiaomei, 2004). This study contributes to the extant EA literature from this perspective. As it is still an unexplored area of research concerning EA adoption in developing countries, it is important to first understand the current state of accounting practices for managing environmental costs within this context, with the focus being on the Shariah- compliant companies.
Environmental Accounting towards environmental performance
According to Deegan (2003a, p.10), Environmental Accounting (EA) relates to the provision of environmental performance-related information to stakeholders both within and outside the organisation. By this definition, EA covers both financial and management accounting, with the former focusing on reporting (ER) and the latter focusing on internal decision making. The latter is generally referred to as Environmental Management Accounting (EMA). Burritt, Hahn and Schaltegger (2002a, p.41) classify EA in a more detailed manner by splitting it into two:
monetary and physical environmental accounting. This categorization represents the two different types of environmental performance-related information, and also reflects the two types of corporate environmentally related impacts: first, the environmental impact on the economic situation of companies (monetary units) and, second, the impact of corporate activities on ecological systems (physical units). Generally, EA helps companies to go beyond the capability of their conventional management accounting system by uncovering, and then having a full measure of business’s environment-related costs and benefits, and to later integrate this information into day-to-day business decision making. The EA method arises in response to the increasing concern for sustainability and the limitations of conventional management accounting systems in addressing this issue (Burritt, 2004; Gale, 2006a; Gale, 2006b; Jones, 2010).
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The implementation of EA is expected to enhance the quality of decision making and plays a significant role in supporting the application of green technologies such as Cleaner Production (CP) (Staniskis & Stasiskiene, 2006; Willshurmst & Frost, 2001). In order to make decisions to invest in green technologies, companies must look at the cost of production, processes, products and activities from an environmental perspective. However, this requires procedures and a framework beyond what is currently being offered by a conventional management accounting system. The current system does not take into consideration the environmental-related information while calculating for investment projects’ inflow and outflow, which may distort the overall decision process (Russel et al., 1994). Such constraints produce inaccurate costing on which companies base their operational decisions, making new technologies unattractive to be invested in because their costs and benefits are not apparent (Gale, 2006b; Staniskis &
Stasiskiene, 2006). In contrast to a traditional accounting system, the EMA approach is able to demonstrate the real potential of each investment alternative and further justify the application of green technologies. A study by USEPA (1995) on 29 companies in the highly polluting organic chemical industry found that chemical plants which applied some type of environmental cost accounting programme have an average of three times as many pollution prevention (P2) projects as plants with no environmental cost accounting system. This has led to 1.6 million pounds of waste being reduced for each P2 project, which is equal to an average savings of $3.49 for every dollar spent (USEPA, 1995). The use of EMA information in investment appraisal also assists companies to decide wisely on alternatives that further lead to an improved firm performance (Burritt et al., 2009; Deegan, 2003a). A more recent study by Schaltegger, Viere and Zvezdov (2012) adds evidence on the suitability of EMA to support CP in developing countries. Based on case study of Sai Gon Beer in Vietnam, the authors describe how EMA application improves the existing environmental management systems by breaking down the physical inputs and outputs to production steps and supply processes, which this has led to the identification of several alternatives for improvement.
Methodology
This study is interested in exploring the practice of Shariah-compliant companies regarding environmental management, by the means of environmental accounting tools. To be qualified as a Shariah-compliant company, the companies need to undergo screening process and meets the qualitative and quantitative parameters set by the Shariah Advisory Council of the Securities Commission of Malaysia. Among the important parameters is regarding the mixed of halal and non-halal elements towards the profit and revenue of the company. If the contribution of the non-halal activity exceeds the benchmark, they will not be classified as Shariah-compliant.
However, concerns about environmental issues are not as important criteria in this screening process. Since the view of Shariah cannot be limited to only legal and illegal affair, but must be viewed as a comprehensive system of faith and practice (as been discussed in the previous paragraph), the environment should be one of the prioritized agenda by these companies and supposed to be one of the requirement for such listing.
This study is exploratory, with the objectives of examining the current rate of adoption of environmental accounting among the Shariah-compliant companies in Malaysia and to see the support of the top management towards the matters. The sample is those companies in Malaysia, under the category of consumer products, industrial products and construction. As at May 2012, there are 125, 262 and 41 Shariah-compliant companies respectively, listed in Bursa Malaysia.
Mail survey was employed as the main method of data collection for this study. The targeted respondents in this study were accountants and those in equivalent positions (for companies
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that use a different name for the same scope of the task). Questionnaire was sent and the respondents were asked to state whether they have adopted any of the following practices:
• Environmental cost accounting
• Environmental life-cycle costing
• Environmental target costing
• Material flow cost accounting
• Environmental capital investment appraisal
• Environmental performance evaluation and indicators
• Environmental budgeting
In addition to this, respondents were also asked about the support received from their top management regarding environmental issues. These questions were intended to provide information on the link between organisational factors and the likelihood of adopting EMA, as is evidenced in much of the management accounting literature (Abdel-Kader & Luther, 2008;
Christmann & Taylor, 2001; Gosselin, 1997). Top management support is a crucial factor in advancing environmental practice among business firms (Dayana, 2010; Lin & Ho, 2010). The respondents were asked to rate in the scale of 1 to 5, with 1 = strongly disagree to 5 = very strongly agree for each statement on top management’s support.
Results and Discussion
In total, only 32 companies returned the questionnaire. Table 1 reports that 81.2% of the respondents can be considered as adopters. This information is concerning, however; the result is consistent with Dayana (2010) and Smith et al. (2008) which regards to the adoption of management accounting innovations by companies in Malaysia.
Table 1: Adopters vs Non-adopters
N %
Non-adopters 26 81.2
Adopters 6 18.3
Out of 6 companies that adopted environmental accounting practice, 5 of them are from industrial products industry and one from construction industry. None of the adopters are from consumer products industry. 15 of the non-adopters stated that they have never even discussed on implementing environmental accounting within their firms. However, even though the percentage of adopters is low, but 11 of them were saying that they have placed some consideration for the practice. Hopefully the number of adopters will increase in the future.
Table 2: Mean score and t-test for top management support
Mean t Sig. (2-tailed)
Top management interest 3.00 -2.885 .007
Top management considers environmental issues as important
3.38 -2.869 .007 Top management effectively communicated
its environment support
3.13 -2.667 .012
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Meanwhile, Table 2 reports on the findings for top management support on environmental issues. Overall, the mean score for each statement indicated that most companies are not placing the environment as an important concern. The t-test results shows that there are a significant difference between adopters and non-adopters (t (30) = -2.885, -2.869 and -2.667, p = 0.007, 0.007 and 0.012). This supports the suggestion that companies whose top management support and concerns towards environmental issues are visible will be more likely to adopt environmental accounting.
Conclusion
This study reveals that environmental issues not been embedded yet among Shariah-compliant firms in Malaysia. This is frustrating since it gives the impression that even Shariah-compliant companies take an indifferent attitude towards environmental concerns. We expect that such firms would carry the truth Islamic value, particularly in respect of reducing wastage and utilizing resources. However, this might be the starting point for the policy maker to ponder and to create a more holistic approach to protect the Earth. Perhaps, the environment should be one of the item in the checklist, as one of the requirement needed for the company to get listed in Shariah-compliant securities. It is important that religious awareness and Shariah guidance be employed by all possible means, at all levels- individual and companies, so that hifz al-bi’ah (preservation and protection of environment) can be done.
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