venturelli@aib.bs.it, pilisi@aib.bs.it
Abstract. The research project “EMA in SMEs” arose from a wider programme which Associazione Industriale Bresciana (AIB)1launched about three years ago to promote the diffusion of integrated management systems in local SMEs.
In this programme the environmental accounting system (EMA), linked with a quality costing, has represented an instrument to overcome the reluctance of small companies towards management systems.
First AIB developed basic evaluation check lists consistent with the implemented environmental manage- ment systems (EMSs) and then it tested and improved them in ten different pilot companies2.
In the stage now in progress, AIB experts are implementing EMAs in companies having suitable account- ing systems, or adapting the existing ones to EMA requirements, with two main results:
• First: correct implementation of EMA.
• Second, but no less important: the improvement of accounting systems of small companies and, consequently, also of their organisations.
This paper will present three complete case studies of three SMEs that prior to the AIB Project had no system for measuring and analysing environmental costs and which have now successfully implemented an EMA. For each case the identification and quantification of environmental costs will be described, as well as the solutions adopted to identify and register them periodically through the information systems.
©2005Springer. Printed in the Netherlands.
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P.M. Rikhardsson et al. (eds.), Implementing Environmental Management Accounting, 207-235
1 INTRODUCTION
The preliminary results of the experimentation on environmental management accounting in ten local SMEs have already been presented in a previous paper3.
Figure 1.The “unusual route” to EMA in the project
The following pages will describe the results of a more advanced stage of experi- mentation and will focus on how existing accounting systems of the companies involved have been modified to permit a periodic monitoring of environmental costs.
In particular, these modifications will be described in three detailed case studies.
Before entering this advanced stage of the project, we would like to summarise the context in which the research project was developed. From the beginning EMA testing in local SMEs has in fact been characterised by very peculiar and unusual motivations, as shown in Figure 1.
Due to the companies’ real interest in this instrument, the introduction of EMA was not conceived by AIB to promote the diffusion of integrated management systems of quality, environment and safety in the associated SMEs, but, rather, to different needs arisen within a five-year project. This project is addressed to improve the health and safety at the workplaces through the improvement of company organi- sation.4AIB is in fact deeply convinced that the Management Systems of Quality, Safety and Environment, if properly integrated and certified, can contribute signifi- cantly towards improving the organisation and consequently the safety of the SMEs.
This improvement of the organisation in small companies consists in developing in-
formation flows and dialog among the various departments (sometimes lacking), in increasing knowledge of aspects and activities usually ignored, in a better training of human resources, etc.
Along the way AIB encountered a series of obstacles, such as the lack of interest and often even the opposition of companies, especially small and medium ones.
Environmental management accounting has been introduced in the Project on implementation of management systems with the purpose of convincing companies to participate. In particular, EMA has been introduced during the implementation of environmental management systems (according to ISO 14001 standards) in a sample of 60 SMEs. The experience of environmental management systems implementation has been described by Pilisi and Venturelli in Introducing environmental manage- ment accounting in small and medium-sized enterprises, in Bennett et al. (2003).
Table 1.Total number of Italian and Brescia local units5
It is noteworthy that the main project on management systems was directed towards SMEs and to show how much they really represent the backbone of the local indus- trial context.
Both in Italy and in Brescia about 90 per cent of industrial companies have be- tween 10 and 50 employees6, and 95 per cent have less than 100. As the large major- ity are SMEs, it made sense to direct the project at them, although they really were the companies with least interest in the adoption of new systems of management.
The offer of free-of-charge EMA, arisen to overcome the reluctance of companies to participate, was not sufficient to motivate the companies: the owners still were fairly sceptical, considering environmental costs relatively low and negligible.
Faced with these difficulties, AIB decided to enter companies through a sort of
“Trojan horse”: the costs of quality. The industrialists were very interested in know- ing the quality costs, since these costs and their impact on the organisation were considerable.
Employees 10-50 50-100 100-200 200-500 over 500 Total
Brescia Number
of firms 3,757 268 107 56 6 4,194
% 89.6% 6,4% 2,6% 1.3% 0.1% 100.0%
Italy y Number
of firms 89,022 7,417 3,262 1,467 407 101,575
% 87.6% 7.3% 3.2% 1.4% 0.4% 100.0%
To this end, joint check lists to collect quality and environment costs have been developed7 and provided to the companies. These check lists contain a series of environmental and quality cost items8, which were a result both from a survey of literature on this issue, and from direct experience in SMEs involved in the project.
The check lists, which gather environmental costs as a complement to quality costs, use the same logic and the same classification for both categories.
Environmental costs are therefore divided in:
1. Prevention costs: all costs sustained within the production site to prevent and avoid negative environmental effects, and to improve the firm’s image. Included here are, for example, costs for running the EMS, costs for measures to prevent negative environmental impact at the source, and managing relations with third parties.
2. Monitoring costs: costs sustained to monitor and control the working of the EMS and the cost of monitoring environmental performance, such as the cost of labo- ratory analysis.
3. Failure costs (or costs of non-environment) divided into internal and external failure costs:
3a Internal failure costs: all costs strictly connected to the environmental impact of the production process within the site, costs caused either by inefficient use of natural resources, or by the treatment of the pollution produced (end-of-pipe solutions) that were not avoided by preventive action. These include waste water treatment, air emission treatment and on-site storage of waste.
3b External failure costs: costs for impact outside the site, therefore more visible to the public and for which the firm is economically responsible. These include transport and off-site treatment of refuse, fines and payments to third parties for environmental damage.
With the proposal of a joint evaluation (quality + environment) the attitude of the companies changed and, on this basis, the collaboration started to be fully satis- factory and useful.
(EMA) IN THE PILOT COMPANIES: THE STATE-OF-ART
At the beginning of 2003, after about two years of experimentation, thirteen com- panies were involved in EMA.
Table 2 highlights that all companies are SMEs, mostly from the mechanical sec- tor and with a staff of between 22 and 156. The sample was divided into two groups:
one which is in the “first stage” of experimentation and another in the “second stage.
2 THE APPLICATION OF THE ENVIRONMENTAL ACCOUNTING SYSTEM
Table 2.The companies involved
In the first stage AIB staff approaches a company and, together with its employees, they identify and quantify environmental and quality costs of the year considered, giving a sort of “snapshot” through an analysis of each item listed in the check lists.
This gives the companies a basis for deciding whether the collection of costs should be continued or not.
The second stage consists in setting up a periodic monitoring of quality and environ- mental costs through suitable analyses and modifications of the accounting and information systems. At this stage the “snapshot” of costs switches to a “film”.
Seven companies out of thirteen have participated in the first stage of experi- mentation (although three of these stopped before the conclusion of this stage); six companies completed the second stage and have successfully implemented an EMA:
N° Production sector Production Discontinued Staff
First stageg
1 Foundry Alloy wheels X 140
2 Mechanical Design and sale of alloy wheels 25
3 Mechanical Injection presses for plastics 85
4 Chemical Production and sale of additives and detergents 57 5 Chemical Blowing and filling of plastic containers 22 6 Mechanical Development and production of prototypes X 68
and serial production ofsprings
7 Chemical Production and sale of industrial gaskets and X 156 technical items in rubber
Second stageg
8 Mechanical Production of spare parts and accessories 150 for cars, lorries, tractors, motorbikes,
micromotors; mechanical working in general
9 Mechanical Production of valves for taps 100
10 Mechanical Production of pistons for cars 90
11 Foundry Production of lead shot for hunting and lead 20 parts for batteries
12 Foundry Production of lighting systems in aluminium 44 for outdoors
13 Beverages Treatment, bottling and sale of wine 30
they have in fact adopted a system of periodic monitoring of environmental and quality costs. This can certainly be considered a good result, but it should, however, be compared, with the difficulties encountered both in first and second stages of implementation.
Evidence of these difficulties is in the three firms that stopped after the first stage, and thus did not have a complete view of their environmental and quality costs. Rea- sons for these failures extend from general company problems, such as factory trans- fer, to certain SME characteristic like lack of personnel or, more in general, organi- sational problems due to lack of time and specific knowledge about these issues.
In the companies that decided to go through with the activities encountered more difficulties. Where pressure and motivation from the Owner and from General Management were not felt, the project encountered lots of obstacles and unavoidably time ran short.
Figure 2 shows an example of reminders that were needed in four companies in- volved in the project. These reminders consisted in numerous requests from AIB to the companies to get cooperation in gathering the data necessary to identify, quantify and analyse costs. Although most of the work was done during the meetings with AIB, the staff also had to do some work outside the meetings.
Numbers speak clearly: 15, 12, 10 and 9 reminders were necessary in the four companies taken as example.
Once again this fact proves that the majority of companies adhere to the project not because of a real interest in instruments like EMAior environmental management system (EMS), but because of a trust in the Industry Association. Usually there is also a strong spirit of competition that encourages owners to establish these systems to copy their rivals or to beat their competitors to it. It is worth mentioning that the major part of the companies involved has less than 100 employees and doesn’t have important environmental impacts: these companies do not reap substantial benefits from the adoption of an EMS or EMA in terms of improvement of visibility or enlargement of markets.
Figure 2. An example of companies with low motivation
In common fairness to the companies it should be mentioned that environmental costs of the pilot companies lie between 0.07 and 1.26 per cent of sales. This is relatively little compared with quality costs and probably not sufficient alone to create the necessary motivation.
Figure 3 shows how environmental costs are distributed, in average, in the three categories of prevention, control and failure.
Figure 3.The three categories of environmental costs
12 9 10 15
0 5 10 15
1 2 3 4
Company Number of reminders
Prevention 29%
Failure 65%
Control 6%
6%
It is obvious that the large majority of costs are in the third category showing the companies’ rather passive attitude towards environmental issues: consequently the companies are not naturally attracted by EMA.
Let us now examine the behaviour of the six companies which completed both stages: they can be considered the “best in class”. In these companies General Management (which in all cases was in fact also the owner) showed a strong interest making it possible to apply EMAs effectively.
Below is shown the effort, in terms of number of meetings – in the first and the second stage – that these companies put into implementing an EMA combined with quality costing. The number includes only the meetings between AIB staff and the staff of the company; internal meetings among the different functions to gather or analyse data are not included.
Figure 4.The best in class
Given the small size of companies and the limited resources they could dedicate to these unusual activities, their effort must be considered notable, in particular for the first stage of identification and quantification of costs.
The number of meetings in the second stage is, in general, low. However, to these meetings has to be added the time spent on operationalising the system. Moreover, the changes made to the companies’ information systems imply some important novelties which need time to be assimilated.
They include (see Table 3):
1. The introduction of a new environmental cost centre, meaning that the company has added a new cost centre to collect environmental costs
0 2 4 6 8 10 12 14
Number of meetings
First stage Second stage
2. New accounts in the accounting system where the chart of accounts was extended with accounts specifically for collecting environmental information
3. New items in the automatic registration of personnel time for employees involved in environmental management. For some activities it was not possible to propose this automatic registration in which case the registration was based on estimates made by the Environmental or Production manager.
4. Specific codes to identify and to characterise environmental orders – meaning alpha-numeric character associated with a commercial order to identify it as rele- vant to Environmental Management (e.g. new control instruments; environmental consulting etc.)
Table 3.Main modifications to accounting systems of the companies
The solutions adopted are different, depending on structure and organisation of each company. To understand the reasons of each choice it is helpful to analyse in depth three out of the six companies involved that have successfully implemented an EMA.
Company Env. Cost New New items in the Estimatated % Specific
Centre accounts automatic for env. codes for
Registration personnel env.
of personnel time time orders
1 X X X X
2 X X X X
X X X
4 X X
5 X X X
6 X X X
9
All the three cases presented in this paper regard companies located in Lumezzane, a town in the Province of Brescia. This is one of the areas with the highest density of industries in Italy, with more than 1,800 industrial companies for 24,000 inhabitants.
In other words, in Lumezzane there is one companyfor every 13 inhabitants (mean- ing one company for every three family units!)
Lumezzane is an important industrial district for metal products, such as household articles, valves and fittings.
3.1 EMA at Rubinetterie Bresciane S.P.A.
Rubinetterie Bresciane (RB) is a mechanical company employing 100 people; it produces valves for taps (see main data in Table 4). The majority of products are used in the water, heating, sanitary, gas and marine industries.
Table 4. Description of RB
RB was the first company to take part in the wider project on EMSs, and is now participating also in AIB experimentation on health and safety management systems (OH SAS 18001). The pioneering spirit of this company is obvious.
Before the company makes modifications to implement an EMA, it is important to describe the main environmental impacts.
The following figure shows part of the conclusions of the preliminary environ- mental analysis, carried out by the firm in 2001, during EMS implementation.
It can be seen that the main environmental impacts are noise produced by trucks during loading and unloading (the firm is situated in the middle of a residential area) and waste, mostly due to the packaging of raw materials. Also the presence of roofing containing asbestos has a potentially significant environmental impact that is to be managed with specific operative procedures.
Production Employees Sales (2002) Markets Certifications
Taps 100 36,814,000 Italy: 45% ISO 9001
and valves Euros Europe: 30% ISO 14001
Others: 25% (from 2001) OH SAS 18001 (in progress) 3 SUCCESSFUL IMPLEMENTATIONS OF EMA: THREE CASE STUDIES .9
Figure 5.From the preliminary environmental analysis
3.1.1 Environmental costs before the AIB Project
Before starting the project, RB did not monitor its environmental costs.
There were no specific environmental accounts or cost centres, no environmental codes within the information system used by the company to record employees’ time.
On the other hand, in this information system there was both a quality cost centre and specific codes to calculate the time of personnel involved in quality management.
The first stage of the project, which provided a calculation of environmental and quality costs for 2000 and 2001 using AIB check lists, gave overall data on environ- mental costs (0.23 per cent of sales for 2000 and 0.24 per cent for 2001) and a high detail of the various cost items.
Figure 6, which represents the situation in 2000, shows the environmental costs divided by area of impact: costs referred to”air”, “water, “waste”, “noise” areas, etc.
There is also a category called “general expenses”, which does not include all expen- ses in a specific environmental area and that concern environmental management system in general.
The figure below highlights that most expenses are represented by the decontami- nation of roof containing asbestos (63 per cent) and by waste (collection, manage- ment, taxes, disposal: 25 per cent) respectively. These costs are followed by costs for general expenses (mainly personnel time to prepare the necessary documentation for EMS: procedures, manual, etc) and costs for air (analysis of emissions to air) and noise areas (analysis of external noise).
In 2001 the largest portion (43%) consists of general expenses (cost of personnel dedicated to documentation for EMS, the cost of training and the cost of certifi- cation); minor costs are due to waste management (24%), to water area (21%), due to reconstruction of sewage systems, and to emissions to air (4%).
“...…
The main environmental problems associated with the production activities of Rubinetterie Bresciane Bonomi regard the production of waste and noise. In particular, the main problems are associated with the raw materials: most of the waste produced by the firm is a result of packaging, and the external noise is mostly caused by loading and unloading, necessarily done outdoors.
In the production cycle possible risks due to dangerous substances polluting the ground are highly improbable, except for possible leakage from the old underground tank.
Other environmental problems are the presence of building materials containing asbestos mostly due to the age of the building.”
Figure 6.Environmental costs by areas in the year 2000
Figure 7. Environmental costs by area in 2001
Using the typical classification adopted for quality costs, the composition of environ- mental costs appears the same for both years: the majority of costs are preventive costs, followed by failure and control costs. The first category (“prevention”) also in- cludes the costs for EMS implementation (consulting, time for production and up- dating of documentation), the training, the cost of certification, the purchase of plants with lower impact, etc.
Based on the analysis of quality plus environmental costs (2.09 and 2.26 per cent of sales for 2000 and 2001 respectively) AIB staff, together with Environmental, Administration and IT managers, drew up a schedule for implementing the EMA system, after receiving the authorisation by the owner to proceed with the necessary modifications.
It is important to note that this decision was made by the owner wholly on account of amount of quality costs, to which environmental costs were added on.
3.1.2 Previous allocation of environmental costs
After identification and quantification of costs defined as environmental by the AIB framework, these costs were verified in the existing accounting system. Table 5 shows the previous allocation of these costs.
In the first column all environmental costs of the company (taken from the list of items in AIB check lists) are listed; in the second one the number and the name of accounts in existing accounting system are placed. The third column shows the classification of costs adopted by the company that divides costs into direct costs of production, indirect costs of production and overhead costs.