Forest Sustainability And Accounting
Dr Stella Sofocleous
School of Accounting and
Finance
Victoria University
PO Box 14428
Melbourne CMC
Vic 8001
Australia 03 96622077
Australia 03 96633202
ABSTRACT
The aim of this investigation was
to examine ways in which a manager of a timber firm, of a particular size,
makes short-and long-term decisions affecting the environment of the forest.
Should the size of the timber firm affect the decision-making processes of this
manager, who usually applies various accounting policies, then this factor is
considered able to further influence forest users to follow specific
sustainable forest practices. Thus, it is apparent that when management
decisions within a timber firm are being made, net profit is by no means the
only factor taken into consideration. 
The findings of this research offer accounting policy makers the
chance to consider the timber firm as part of an industry comprising firms of
different size that react differently under the same set of accounting rules.
Therefore, the future condition of the forest resource is ultimately dependent
on those accounting policy makers, who should consider the above factor if they
expect the timber firm to create a sustainable environment and maximise
benefits successfully.
FOREST SUSTAINABILITY AND ACCOUNTING
1.
INTRODUCTION
As each second ticks by, thousands of managers within the timber industry make decisions that ultimately impact upon the world’s forestry resource. Forestry can be considered as the science of regulating the forest resource for the benefit of mankind. Successful management of this forest resource is believed to ensure the renewable nature of the timber industry business. (Makris: 1989)
This paper is aimed at investigating ways in which a timber firm in Australia of a particular size (according to employee numbers) may operate, by means of policies and effective management, to secure the sustainability of the forest resource for current and future generations. (Rubenstein: 1994) However, ecological limits are outside the parameters of this research. Throughout this paper, sustainable forestry will be studied according to three specific inter-dependent and integral components. These are accounting practices, taxation/subsidies and regulation/control policies. Such elements were chosen as they were thought to most appropriately represent the factors similar to those most likely to be faced by primary industry decision-makers in the process of the industry activity. The main objective of any timber firm, as with all other profit-orientated firms, is to ensure, the maximisation of net profit after tax. (Rubenstein: 1994, Chant et al.: 1991) However, a timber firm may only maintain success if it can balance this requirement of monetary gain with an ability to practise sustainable forestry in the long term.
For the purpose of this paper, the researcher considered that both
these goals, that is, increasing profit and achieving sustainable forestry
could be accomplished through effective management of modified accounting
practices, including amongst others, intra-generational valuations, valuations
of other forestry products (such as recreational facilities when calculating costs), and the social cost of
forestry (that is, the deprivation of clean air and extinction of fauna and
flora species used for medicines). (Rubenstein: 1994)
The presence or absence of any of the above variable
may inhibit or improve a firm’s ability to ensure sustainable forestry. Meanwhile,
most economies and their governments have taken no drastic measures to rectify
the way the forest product industries operate throughout the world.
Nevertheless, at the same time, such industries must also be aware of their
role in fostering an environment that bolsters the earth’s survival.
(Kestigian: 1990, Brown: 1994)
2. RESEARCH OBJECTIVES
In western societies, natural resource distribution
and exchange rely on market regulation and the forces of supply and demand.
When making decisions, some of the critical factors affecting the operation of
the market are the availability of information from financial reports, the
penalties imposed by taxes, the availability of favourable subsidies and the
imposition of regulations and controls.
Forests are a natural resource and as with any other
profit-making business, forest management is expected to produce, with the same
amount of investment, a higher outcome. This can be achieved with the proviso that the aforementioned
factors are changed to ensure timber-harvesting will guarantee sustainable
forestry and financial satisfaction of the owners of the timber firms. Current
accounting systems do not take into account the size of the timber firm.
Accounting bodies have one set of policies for both small/medium to large
firms.
In summation, it is the assertion of this research
that specific policies involving forest sustainability must be imposed in order
to ensure the recognition of the clearly non-homogenous character of the timber
industry by the accounting profession
and also the community in general. Such policies must not only be of a
theoretical nature but should also be practical in their application. This is
of utmost importance in regards to the survival of the timber industry and,
more importantly, the future preservation of Australian native forests.
3 ACCOUNTING POLICIES
In
the past, accounting has been considered as a method for measuring the expenses
and revenues of a particular firm in a set period of time. Concurrently,
accountants studied the firm’s past accomplishments in order to forecast future
business outcomes. However, as Accountants play a vital role as, according to
Rubenstein (1994), they “provide a roadmap for those in the driver’s seat such
as senior management and the board of directors”. Ahearn (1997) notes Clift’s
(1992) book is about accounting with an emphasis on its role in the
communication of information and the control of affairs in the business. Kestigian (1990) says that the basic role
of the accounting profession is to change from theory and experimentation to
more concrete foundations and to supply conceptual, measurement and reporting,
as well as a comprehensive reporting system of both qualitative and
quantitative methods applicable to the community.
In addition,
Herbohn et al. (1998:64) suggests that the accounting profession should assist
with the development of an increasingly important area of accountability and
Gray (1990) stated that although accountants have the possibility of remaining
inflexible to altering patterns of behaviour agrees with Kestigian (1990),
their duty is to provide information that has political, social and
environmental components. Kestigian (1991) also believes that accountants have
accentuated their ability with numbers instead of their capacity to operate in
other areas, such as design, examination and evaluation of information systems,
and data collecting and appraisal. On the same issue Gray (1990) notes that
today an accountant requires the expertise of professionals such as engineers
to form opinions on the financial accounts and that the same should apply with
any environmental issues in order to follow environmental accounting and
reporting. Gray (1990) suggests that accountants must offer their
qualifications in the design of new accounting and auditing procedures for
environmental accounting and reporting. Rubenstein (1994) stated that an
accountant’s objective is to provide enhanced and new information that will aid
the process of informed decision making. Also, accountants could calculate the
costs of adapting to sustainable development. Management, internal experts and
scientists must resolve which industry practices will have to change in order
to achieve sustainment.
Extensive research
into the role of accounting in forestry started in 1993, when logging by
Australian timber firms became a front-page newspaper item. There was an
obvious need for a change in the way accounting valued renewable resources and,
in particular, the timber in order to find the valuation method that represents
the most sustainable practice.
There are alternative methods of valuation available
for renewable resources, including the forests. These methods describe the time
of valuation of the timber resource either as trees grow or at the time of
harvesting. Herbohn et al. (1998) stated the main problem with the valuation of
the forest resource was to achieve an overall agreement as to when is the
correct time to value the timber in the forest. As trees take years to develop
the individual investor is disadvantaged when it comes to return on
investments. Currently, accounting, taxation and legislation do not agree on
the method to follow with regard to time of valuation of timber.
When
a firm is involved in the production of goods that incorporate the use of the
environment throughout the goods’ life then this firm should include the
environmental cost as part of its costing. Rubenstein (1994) defines full cost
managerial accounting as privately allocating direct and indirect costs to a
product or product line and believes it should include environmental costs
throughout the life cycle of the product, from raw material extraction to
product disposal, which may not be shown directly/indirectly on the bottom line.
Therefore, a firm’s
environmental costing must include costs from the engineering stage to
motivation, compensation and evaluation of the performance of employees. In
implementing this proposed sustainable practice there are two methods
available. These are the Life Cycle Costing (LCC) and Activity Based Costing
(ABC). Life cycle costing (LCC) should provide identification of both the
private and social costs of a product, process or activity throughout the
product’s commercial life from raw material acquisition to disposal. In
forestry, one must report the costs and the business benefits of taking a
longer-term view of the forest.
In addition, investments that are related to the environment create
problems. With no information to support making an informed decision,
management must accept or reject investments that lead to sustainable
development. Problems as serious as remaining in existence or making the wrong
decisions because of lack of calculations (return of the investment and the
payback to the investor) can be taxing to the forest manager. Rubenstein (1994)
enters this area of discussion by indicating the problems with which a forest
manager is faced. Further, according to Rubenstein (1994), sustainable forest
development can benefit a firm, assisting it to remain true to the going
concern principle. Hence, investment in environmentally protective plant and
equipment increases the perceived goodwill of the firm and so helps ensure the
firm’s continued presence.
Decision-making
can also be based on several principles. Brown (1994) and Keegan (1992) endorse
that there are specific environmental principles that affect industry and
commerce. Brown (1994:609) opts for Corporate Environmentalism to claim that
profit- making is not the only business goal and that managers must care for
the environment because it is socially unacceptable to damage the environment
in order to make profits. The current movement is for businesses to place
environmental safety before profits.
Another
interesting interrelationship is the one that relates logging/wood-chipping
activities, profits and/or sustainability of forests and services other than
timber that forests provide to the community.
“It is clear that logging practices which would
maximise the probability of survival of Leadbeater’s Possum are different from
those which would maximise the net value of timber value alone”. (Kennedy and
Jakobsson: 1993:1)
The Accounting Standard 1037 (AASB 1037) on renewable
and re-generating asset was issued (effective date for the standard is July 1,
2000). The fact that a standard was written on the valuation of renewable
resources and its accounting treatment indicates a necessity that existed in
the past. It is remarkably interesting to note, however, that AASB 1037 does
not differentiate accounting treatment between small and medium/large timber
firms. It may fill the gap of varying existing accounting treatments of the
renewable resource but still regards the timber industry firm as a homogenous
unit that is deemed to act the same in response to imposition of accounting,
taxation/subsidies and regulation/control policies.
The researcher chose the above as the most essential
current issues on accounting and forest sustainability. The main points can be
summarised as follows:
·
Accounting is a discipline and a profession with political, social,
economic and environmental components. The accountancy profession could play a
role in assisting define the balance between business and industry’s profit and
the need to ensure that no unnecessary damage comes to the environment.
Accounting information systems can supply information that may be used to make
environmental decisions. This information must follow technology advances.
Further, accountants play a crucial role providing the route to administration
and should accentuate their ability to operate in other areas, such as design,
examination and evaluation of information systems, and data collecting and
appraisal. Accountants also need the knowledge of professionals such as
engineers to form opinions as to the state of financial accounts and any
environmental issues. The accountants’ objective is to provide information,
which is enhanced with environmental information that will aid the process of
informed decision making. Moreover, accountants could calculate the costs of
adapting to sustainable development and indicate the difficulties encountered
in the valuation of forests. For example, in the private sector, because of the
valuation of the forests for financial reporting purposes there are reliability
problems. The particular calculations are also complex. Currently, the
individual firms apply net present valuation methods, which can be used as a
primary valuation method and can facilitate management’s goals to maximise
profits.
·
In so far, accounting,
taxation and legislation do not agree on the method to follow with regard to
time of valuation of timber. The
main problem with the valuation of the forest resource is to achieve an overall
agreement as to when is the correct time to value the timber in the forest. As
trees take years to develop the individual investor is disadvantaged when it
comes to return on investments. Banks
bear in mind particular environmental risks when providing long-term
development loans. Further, the following costs are involved in the production
of goods that require the use of the environment: permits, compliance,
technology modification, changing source materials, environmental auditing,
developing and maintaining an environmentally appropriate system.
·
Investments that are related to the environment are
faced with additional problems. With no information to support the making of an
informed decision, management must accept or reject investments that lead to
sustainable development. Problems as serious as remaining in existence or
making the wrong decisions because of lack of calculations (return of the investment
and the payback to the investor) can be difficult to understand by the forest
manager. The business structure of the firm can also affect decision-making, as
some business structures may have specific policies they must follow or are
under certain financial limitations. Profit- making, however, is not the only
business goal and managers must care for the environment because it is socially
unacceptable to damage the environment in order to make profits. In a survey of
500 timber firms in Australia it was found that the current movement is for
businesses to place environmental safety before profits. Timber firms must
disregard some suitable habitat parts of the forest and endorse the alteration
of logging practices to attain returns from timber as well as the continuation
of the existence of species dependent on the forest environment. It is
important to estimate the value of survival of the species in comparison to the
value of timber output. This will enable the technical and economic viability
of alternatives to clear felling to be evaluated. The principle of sustainable
development states that actions today should not be to the detriment of future
generations.
·
Finally, environmental
disclosure is often regarded as corporate environmental disclosure. As a
consequence, this distinguishes between corporate and non-corporate timber
firms and indicates dissimilarity in the business structure of the timber
firms. Further, there is a distinction that refers to the private sector
entities and their type of disclosure. The various types of disclosure
in the private sector firms refer to statements of environmental spending,
qualitative descriptions of the environment and general environmental
objectives. A minority of writers refer to the private sector entities that
have made positive changes in their reporting practices. Annual reports should
contain specific non-financial and supplementary disclosures, including quality/quantity of the resource, any restriction on
forestry asset’s operations and descriptive information about substitute
measures for current market value. Further, the public sector has two
conflicting trends with regard to the disclosure of non-financial information.
Some annual reports have separate sections devoted to environmental disclosure
and descriptions of environmental activities, whereas some reports offer
minimal environmental disclosure or none at all. The following are important items
that can be included in the final accounts: valuation of forest assets,
recognition and measurement of value changes, balance sheet classification of
forestry assets and disclosure of non-financial information.
4. RESEARCH QUESTIONS
4.1 OVERALL PURPOSE
This research investigated the effects of the
size of the timber firm on forestry practices and in particular, accounting
practices, which assist the sustainability of forests and their preservation.
The following was the suggested research
question, which was addressed.
Can the size of a firm operating in the primary
sector of the timber industry affect the firm’s sustainable forestry practices
and in particular the accounting practices?
As the main purpose of this research was
expected to provide the effects of the size of the timber firm on sustainable
forestry practices, a secondary investigation could assist to explore
circumstances in which the preferences in sustainable forestry practices
differrd because of the variation in size of the individual timber firm.
The following was the secondary research
question to dealt with:
Do small timber firms have different preferred sustainable forestry practices to medium/large timber firms?
The research undertaken in
this paper was conducted in three distinct stages. The first stage included an
intensive literature review of several sustainable policies in accounting,
taxation/subsidies and regulation/control policies, which were originally
listed in various references and other research media. The literature review
was imperative to establishing the research questions and identifying the
policies that were accepted by the majority of authors as necessary for the
enhancement of forest sustainability through the management of timber firm
practices. Ultimately, it was stated, such occurrences would lead to further
preservation of the native forests. Common implementation problems surrounding
such policies as identified in the literature were discussed. Throughout this
discussion, the blanket application of policies became a predominant concern to
the researcher. Most accounting policies were imposed uniformly and yet
inconsistently, with no regard being taken for the existence of considerable
variations in the size and business structure of timber firms under which the
forest primary producer is operating. Thus, the homogenous nature of such
policies was thoroughly investigated in this first stage of research. However,
the literature on the impact of size of timber firms on sustainable forestry
practices was limited.
While a review of the
literature was indeed imperative to the establishment of the research questions,
interviews of entities involved in the use of the forest resource were also
necessary. This second stage dealt with interviews of the key personnel
involved in the operation of timber firms. This niche was selected due to the
concentrated experience demonstrated by this micro cosmos of the global timber
industry. The interviews provided a means for further understanding the complex
issues connected to the various policies involved with the sustainability of
forests and their implementation among forest organisations not only within
their country, but also on a more international scale. The reason for their
success is that because they have such a small area to work with, they had to
learn sustain ‘best practice’ over the long run. Thus, these interviews proved
invaluable in the construction of a questionnaire, as they could also be
thought of as highly relevant to Australian forestry. More specifically, this
part of the research enabled the observation of the operations of some forest
firms and the witnessing of how particular sustainable forest practices affect
decision-making. Furthermore, such interviews facilitated the recognition and
understanding of the predominant values maintained and supported within those
timber firms. The interviews were conducted over a period of 4 weeks and
comprised of 47 semi-structured interviews. The main objective of the second
phase was to determine those policies in accounting, taxation/subsidies and
regulation/control that affected the sustainability of the timber firm. A study
of those interviews revealed that different business organisations considered
sustainable policies for different reasons and that overall, most sustainable
business strategies were dependent on the size and business structure of the
timber firm as well as varying preferences in regards to sustainable forest
practices.
The third stage of this
research involved the distribution of a postal questionnaire throughout
Australia. The questionnaire provided the means to confirm specific findings from
the interviews, and to investigate various sustainable policies in the areas of
accounting, taxation/subsidies and regulation/control policies and the impact
that the size and business structure of timber firms have on them. The
questionnaires, together with accompanying letters of explanation and pre-paid
return envelopes, were posted to 500 timber firms. Cross tabulation of the
given variables and a statistical analysis of the 36.4% responses confirmed the
contention that the size and business structure of the timber firm does indeed
affect the application of particular policies, which promote the sustainability
of the forest resource for use by current and future generations. A further
summary was necessary in order to group such findings and eliminate unnecessary
details that misleadingly re-directed attention from the main findings. The
size of timber firms and their impact on sustainable forestry practices were
statistically analysed and evaluated. The evaluations were further condensed to
provide evidence for the rejection or acceptance of the main and secondary
hypotheses.
5. SUMMARIES OF STATISTICAL ANALYSIS - ACCOUNTING
POLICIES
As there was a plethora of
information collected a decision was made by the researcher to suppress the
variables and summarise only the ones dependent on the size of the firm. The
plethora of these sustainable policies that are dependent on the size of the
firm indicate that indeed the size of the timber firm is a determining factor
in decision making as far as sustainable practices is concerned. From these
summaries the most preferred policies of small timber firms that are found to
be dependent on the size of the timber firm are marked with an asterisk in the
first column. The second column asterisks are the specific activities that are
dependent on the size of the firm and preferred by the medium/large timber
firms. The third column asterisks indicate the policies that are dependent on
the size of the firm and are preferred by both small and medium/large firms as
sustainable practices. In Table 1, for example, timber firms that employ more
than 20 employees believe that there is a need to use different data collecting
systems for gathering of environmental information that will be used to make
environmental decisions affecting the forest resource and its sustainability.
Table 1: Accounting
policies dependent on the size of the firm
|
Size of Timber Firm |
S |
ML |
B |
|
Need different data
collecting systems when collecting environmental info |
|
* |
|
|
Difficulties associated with reporting environmental
requirements for both government reports and tax purposes |
* |
|
|
|
Sustainability of forestry
practices depends on: -
Annual environmental budgets; -
Environment impact studies; -
Environment capital expenditure impact costs |
|
* * * |
|
|
Environmental disclosure
policy to be shown in financial reporting |
|
* |
|
|
Environmental information
to be included in quality assurance reviews |
|
* |
|
|
Public’s right to access
data on environmental impact of timber firms |
* |
|
|
|
Accountants to provide key
environmental financial data |
|
* |
|
|
Environmental financial
data is expected by management, required to make informed environmental
decisions |
|
* |
|
|
Small firms pay a high
price for disclosing environmental information |
* |
|
|
|
Only the government should
be concerned with the environment |
|
|
* |
|
Relationship between
accounting and environmental issues |
* |
|
|
|
There must be a level of
regulation in reporting |
* |
|
|
|
Particular accountancy
info to be provided to management for disclosure |
|
* |
|
|
Accounting procedures
required, within the timber industry, to produce a quantitative evaluation of
corporate use of forests |
* |
|
|
|
Due to depletion of
resources, firms inherit contingent liabilities |
* |
|
|
|
Disagree with support of
environmental policy |
|
* |
|
|
Support for cleaner
production activities |
|
* |
|
|
Accountants to provide
data that will assist future generations |
|
* |
|
|
Need to provide incentives
to promote forest sustainability |
|
|
* |
|
Must improve traditional
financial accounting data for forest reporting |
|
* |
|
|
Accountants to include
costs/benefits of converting traditional accounting processes and procedures |
|
* |
|
|
Need for a complete shift
from current practice to sustainable operations |
* |
|
|
|
Non-financial information
must relate to the environment |
|
|
* |
|
Evaluate in monetary terms
the other forest services to the community |
|
* |
|
|
Practitioners' belief: net
present value is unrealistic (assumes variables remain unchanged from the
year estimates are made till timber is exhausted) |
* |
|
|
|
Practitioners' belief: net
present value relies on variables such as price, production, interest rates,
operating costs and returns on capital |
|
* |
|
Key: S: Small Firm, ML:
Medium/Large Firm, B: Both (Small and Medium/Large Firms)
5.1
OVERALL
CONCLUSIONS/INFORMATION RELEVANT TO THE SECONDARY HYPOTHESES
This paper has examined and
evaluated, the theory of the imposition of accounting policies,
taxation/subsidies and regulation/control policies across the board as all
timber firms belong to a homogenous group.
The size of the timber firms was evaluated against the set of accounting
variables, which were found in the literature review and preliminary interviews
to represent sustainable practices in the timber industry. This meant that when
timber firms followed those practices forests would be sustained and preserved.
To test this proposition, the analysis involved testing the dependency of those
practices on the size of the firm engaged in the production of timber in the
primary sector of the timber industry. The null hypothesis stated that the size
of the timber firm has no effect on its forestry practices. However, the
statistical analysis performed provided strong evidence that the size of the
firm affects some forestry practices and not others.
The following are summaries of accounting policies
dependent on the size of the firm and preferred by small and medium/large
firms.
5.2 ACCOUNTING POLICIES
PREFERRED BY TIMBER FIRMS
The following is a further
grouping of the data into preferred sustainable forestry policies by small and
medium/large organisations. This
re-enforces the fact that those sustainable forestry practices are dependent on
the size of the firm as there are several policies that the small firms agree
with and which are not always the same as what the medium/large firm prefers.
If this is achieved then the rejection of the secondary hypotheses will be
possible. In addition, respondents indicate their preference or recognition of
certain policies as sustainable. This adds to the fact that policies found by
the literature review and the preliminary interviews are indeed considered to
be sustainable or not by the respondents representing the primary sector of the
timber industry.
The Tables below are
summaries of data gathered and statistically analysed to be dependent on the
size of the timber firm. The information beneath each sub-heading relates to
data contained in the accounting tables. An indicator marks the size of the
timber firms. An indicator beginning with the letter S represents the
preferences of small timber firms. Similarly, an indicator beginning with the letters
ML represents the preferences of medium/large timber firms. When the indicator
begins with S/ML, this refers to a situation in which both small and
medium/large timber firms have a common preference as far as an accounting
policy is concerned. Furthermore, each indicator (S, ML, S/ML) corresponds with
an element within a diagram contained in this research, for example Figure 4.
Such a system was created to allow easy and clear referencing between tables
and diagrams.
Table 2 below summarises the accounting policies dependent on the size of the firm and preferred/recognised by the small timber firm. Table 3 also summarises the accounting policies that are dependent on the size of the firm but preferred by the medium/large timber firm.
Table 2: Accounting policies preferred by the small timber firms
|
Accounting Policies Preferred by the Small Timber Firms: |
|
Small timber firms are of
the opinion that disclosing environmental requirements for both government
and tax purposes is difficult [S1] |