Future generations are unlikely to condone our lack of prudent concern for the integrity of the natural world that supports all fife
Rachel Carson: 'Silent Spring' (1962)
The audit performed by the Supreme Audit Institutions (SAI) seeks to promote the accountability of the Executive to the Legislature. This brings us to the central problem of the objectives of governance, as the scope of the accountability exercise would depend on these objectives. Social and economic research in the years following the last great war, have increasingly converged on economic development with equity as the principal objective of governments. The UN Agenda for Development presented by the Secretary General of the UN in 1994 states that development is a fundamental human right. The same agenda highlights peace as the foundation of development, economy as the engine of progress, environment as the basis for sustainability, justice as the pillar of society and democracy as the kernel of good governance. Sustainability takes equity issues beyond the current generation with a view to preserving the quality of environment for use by future generation of human beings. Good governance is a key element of sustainable development, and sustainability is also the focus of good governance. One would expect audits performed by the SAI to enable an appraisal of how far and how well the actions of Governments contribute to the achievement of the overall objectives of governance. It is debatable whether the present tenor of SAI audits reflect the accountability of the Executive in relation to these objectives, whether separately or holistically; and whether it is indeed possible for SAI to carry out audits with such lofty and heroic objectives. This article attempts to address the variety of issues, which are likely to arise if we factor environmental concerns of nation states in audit efforts by SAI.
At a fundamental level, the environment provides a biological, chemical and physical system that enables human life to exist. This includes the atmosphere, oceans, river systems, and fertility of soil and biodiversity. The environment provides raw materials and energy for economic production and household activity. Such natural resources could be renewable like forests and fisheries, or non-renewable like petroleum and minerals. The waste products of economic and household activity are absorbed back by the environment, and this sink function allows waste to be disposed of safely. When waste generation is in excess of the assimilative capacity of the environment, we have pollution with its subtle and long-term effects on human health. Environment also provides amenity services in the form of natural beauty and space for outdoor activities. Environmental issues are related to each of these functions of the environment; besides, there could be local and global issues and issues of the present and the future. Air and water pollution with its harmful effects on health would be a local issue, while ozone layer depletion, greenhouse gas emissions, climate changes and biodiversity erosion could be taken as issues of global concern. These issues have become relevant in the modern age as environmental resources and capabilities have increasingly been stressed beyond their limits on account of expansion of industrial activity and increase in human population. Destruction of forests and habitats is driving an estimated 100 species of flora and fauna to extinction every week. Indiscriminate expansion of industrial activity is damaging human health, so much so that today we have in our bodies close to 400 chemicals that would not have been there 50 years ago, simply because at that time they did not exist. World population is increasing by close to a billion every year and 90% of this growth is concentrated in countries which are least able to sustain it. It is therefore generally accepted now (not only by environmentalists), that natural capital as distinct from man made capital is the factor limiting the extent and quality of economic growth. Accordingly there is an urgent need to measure and assign values to the use of natural resources just as values were assigned to capital and labour in the years following the industrial revolution. Moreover, since natural capital is widely perceived as a scarce and limited resource, fresh investment should move towards its preservation, restoration and productivity.
Consideration for the environment in economic development leads us to the concept of sustainable development. Sustainability refers to the long-term health of the global ecology, and sustainable economic development aims to meet the needs of the present without compromising the ability of future generations to meet their own needs. The key aim of sustainability is intergenerational equity, or equity across generations. This in turn depends on the subsidiary goals of promoting efficiency in resource use, fairness in terms of trade and resource allocation systems, fairness to nature and other living beings and promoting survivability of all forms of plant and animal life. The environment has to be treated as an integral part of the economic process and not treated as a free good. Equity is a critical concept under sustainability, and this demands equality of treatment between developed and developing countries and reducing inequalities between rich and poor. Environmental hazards are created by the excess consumption propensities of rich people, while the weight of environmental degradation is primarily borne by the poor people. Sustainability therefore requires leveling of disparities in income and resource use between people within a community and people across nations. Sustainability also requires that society, business, individuals and governments operate on a much longer time scale than the one which presently operates in the economy. Audit of governance would entail auditing for both intra-generational and inter-generational equity, besides auditing for economy and efficiency in resource use and auditing for effectiveness of public policies of sustainable development. Economy, efficiency and effectiveness are already a part of the public audit lexicon, equity being the only novelty imposed by environmental concerns.
Environmental auditing began in the corporate sector in the US in the early seventies, as a compliance response to strict legal requirements. The laws for preserving air and water purity progressively became more stringent; and commercial organizations were being held accountable for environmental damage due to discharge of effluents and noxious chemicals into the atmosphere and oceans. Consequently, disclosure of environmental matters increasingly emerged as an important dimension of corporate and organizational reporting. This trend was disseminated to other countries as subsidiaries of US based multinational companies began following the practices of their parent companies. Over the years, the concept of this audit has voluntarily been broadened so that for some companies it is considered a major tool for promoting sound environmental management and thereby their brand equity. Environmental reporting is however, still at an early stage of evolution, and is being steadily groomed by a variety of organizations like the Chartered Association of Certified Accountants (ACCA) in U.K. and the UN Inter-governmental group on International Standards of Accounting and Reporting (ISAR). In Europe, where environmental legislation is not as restrictive as in the US, environmental audits are used for assessing a company's 'green' image. Some corporate entities like Body Shop, have created a niche in markets based on their green image. Detergent manufactures sell green detergents at a higher price on the strength of the bio-degradable residue which does not clog drains, oil transnationals (including our own Indian Oil) advertise their commitment to energy conservation and the environment, and so on.
In UK environmental audit has moved to the local authority sector since 1989, and several county governments like West Yorkshire, Lancashire; Sutton and North Devon have commissioned environmental audits. B57750, the British Standards Institutions standard on environmental management systems was launched in 1992 and a final version published in 1994. Similar standards have evolved in Ireland; Spain and Canada and these are expected to form a basis for international standards on environmental management systems. The European Union (EU) has also developed an eco-management and audit scheme since 1993. Like the B57750, the scheme aims to recognize efforts to improve environmental performance over time, and highlights the need for a continuous cycle of. improvement. Environmental audits of corporate entities and transnational firms are a central feature of the scheme, and are required to be done regularly. There is an overall emphasis on environmental protection, and on the ability of environmental audits to predict future liabilities for past as well as present and future actions.
In India, however, there is no statutory requirement for environmental audits in the corporate sector or in local self government sector, or of agencies under the Central and State Governments. There is also no pending proposal for introducing such audits, and nor are such themes voluntarily being taken up by the corporate sector or by auditors in the corporate and government sectors. And this is so despite the fact of a rather activist judiciary, a vigorous lobby of environmentalists and a glorious ethnic tradition of conservation in indigenous religions. And despite the Bhopal gas tragedy which figures as a permanent reference (in Ecology and Green Economics textbooks), of the three major environmental disasters of this century, the other two being the Alaskan oil spill and the Chernobyl Reactor!
In corporate reporting on environment, one would be basically concerned with compliance aspects, and the recognition of contingent liabilities relating to the environment. In a nation wide perspective, which aggregates the corporate entities, the civic society and government agencies, one could similarly look for compliance with the domestic laws and the early recognition of environmental contingencies. In the special context of India, the mandate for carrying out an environment related audit could be interpreted from a variety of sources. Judicial interpretation of the fundamental right to life under Article 21 of the Indian. Constitution, has extended this fundamental right to the right to live in a clean environment. A basic feature of all fundamental rights is that a breach thereof could give cause to a legal action against the State through writs, which in common parlance are fast track justice delivery systems. Therefore a situation which could give rise to claims against the State could well be a situation demanding recognition as a contingent liability. Auditors in the private sector have a well defined role in the corporate reporting of contingent liabilities, and a civil suit is available against an auditor if he fails to show 'due diligence' in the exercise of his audit function. Section 40 of the Water (Prevention and control of pollution) Act 1974 and Section 36 of the Air (Prevention and control of pollution) Act 1981, provide a recommendatory role for SAI in the accounts and audit of Pollution Control Boards at the Centre and in the States. Besides, environmental protection also figures as a directive principle of public policy under Article 48-A, and as a fundamental duty of citizens under Article 51-A(g) of the Constitution. Unlike fundamental rights, these provisions are not justiciable, though they set the base for environmental sensitivity of the State and its citizens. Environmental (Protection) Act 1986 has substantially strengthened the powers of the central government in air and water pollution control, with specific authorization to the Central Pollution Control Board (CPCB) for monitoring and enforcement.
Read together, one could possibly build up a role for the Indian SAI in 'value for money' and the traditional three E audits of CPCB and the Ministry of Environment, in the recognition and reporting of environmental contingencies, and for the promotion of environmentally sound national policies. To clarify matters, however, it would be desirable to have a separate legislation detailing the disclosure requirements and specific responsibilities.
It is often opined that environmental audit is best left to environmentalists, and auditors in the Government sector should particularly keep away from a discipline which is not only far removed from traditional accounting concerns, but which is still in an evolutionary stage, and where reporting norms and performance indicators are yet to take a clear shape. While it is possible that environmental issues may eventually give rise to a new and possibly different accounting (as in the case of patrimony accounting in France and physical accounts in Scandinavian countries), the need for some interim and iterative system to formalise and professionalise these matters is paramount as the existing quality of environmental information tends to be cryptic, media based and highly opinionated. Environmentalism as a philosophy has several fellow travelers, and quite a few represent special interest groups, commercial interests and even maverick social reformers. There is room for a balanced appraisal of environmental issues by an agency independent of the Executive and of special interest groups. For a proper appraisal of environmental issues, at a minimum, data whether in accounting format or otherwise are needed to assess the nature of threats to the ecosystems that are being affected by human intervention. There is also need for a wider access to environment audit reports so that the community is fully involved in developing responses to existing and future environmental hazards.
There could be both heroic and routine reasons for carrying out environmental audits. The heroic reason is suggested by the overall objectives of governance, which as we see from above is primarily sustainable development. Starting from the local level of village panchayats and urban municipalities, this would involve a shift from the traditional view of local governments as providers of specific services like schools, parks, roads, waste-collections etc. to a role as 'stewards' of the environment, coordinating the responses of a wide range of agencies. This would be in the interest of both local and global constituencies. A local approach aims to ensure a high quality of environment for people living in a particular area, while a global view attempts to moderate the impact of local decisions on terrestrial ecology and resources. The heroic argument for audits is therefore provided by the need to integrate ecological concerns in the economic management of societies, and the fact that regular audits could make a difference for the better.
The routine reasons are suggested by a recent judgement by the Supreme Court of India which has paved the way for people to seek compensation for land and water contaminated by industrial waste. In terms of this judgement, about one thousand farmers are likely to be paid sums in the region of Rs 323 million ( Economic Times, 15.11.98). Contingent liabilities arising as a result of environmental degradation, suggest a very pressing need for regular environmental audits. The legal requirement of environmental impact appraisals (EIA) before receiving clearance for any major project could also have elements of audit built in so that subsequent compliance is audited against the backdrop of assurances made in the EIA. Even environmental clearances could be audited from a proprietary angle, as there is a public perception of irregularities in according such clearances. Moreover, environmental laws of western societies are fast catching up with domestic laws in developing countries through the UN and its diverse agencies. It would therefore be logical to prepare for a regimen of tough environmental legislation and its due enforcement, before the legislation and its enforcement (as in the case of Supreme Court judgement cited earlier) actually catch up with us and take us unawares. Since Indian laws do not as yet require environment audits even for corporate entities, and as even the profession which could undertake such audits is not clear, it is certain that in India we have a long way to go even though there is not much time.
Environment audits have never been the exclusive preserve of qualified accountants, and several professionals like lawyers, biologists, scientists, or engineers and even public spirited environmentalists are known to have conducted environment impact assessments in India. In fact, accountants have practically stayed away from such exercises, the field being largely dominated by NGOs in the field of environment.
Traditional accounting helps to promote capitalism and profit making at the expense of other socio-economic objectives. According to Tinker (1985), Accounting is a 'social artifact' helping to develop and refine the social relationships which support the unequal exchanges of capitalism. Corporate accounting primarily serves to identify the surplus available for distribution among shareholders (and for taxation by Governments), in a true and fair manner, and community concerns are treated as peripheral with the demand for assured information to investors and tax collectors, treated as more important than to the rest of the community. As a result, in the popular perception, accountants are one of the significant contributors to environmental insensitivity of corporate and other business' groups. This will however change radically, once there is a move to internalize environmental costs and benefits in the corporate income statements and balance sheets.
Gray (1991) makes a definitive stand regarding the involvement of professional accountants in auditing the environment. According to him, a matter as ubiquitous as the environment requires a multi-disciplinary approach and accountants are professionally exposed to such approaches in the course of their work. Accountants are not just experts in financial numbers, but also in the evaluation of information systems and evidence which enable formation and expression of an opinion regarding matters arising in the course of their audits. Gray also makes reference to a moral responsibility of accountants to mitigate the environmental crisis, for which accountants are partly responsible as book keepers to the capitalist system. Auditors with the SAI have, in addition, expertise in auditing for economy, efficiency and effectiveness; and this makes them particularly suitable for making useful comments on information bases which are not presented in standardized formats like the Annual Accounts of commercial corporate entities. Besides, environmental audit incorporates elements of accounting as it is a means of measuring and wherever possible costing an organisations operations against a predetermined set of criteria.
Based on the above analysis, the basic issues of mandate and expertise for environment related audits by SA1 could be taken as broadly settled though a separate legislation on the issue would certainly clarify matters for enabling proper implementation. The next major issue is what could be laid down as a disclosure norm to enable proper audits and appraisals. In the specific case of India, Article 150 of the Constitution permits a proactive role for the SAI in financial reporting and disclosures. Unlike corporate auditors who audit annual disclosures in the light of specific provisions under the Companies Act, SAI could recommend disclosures which it could later proceed to audit.
Audit has a fundamental accounting bias, and accounting methodology is flawed when it comes to classification of environmental categories, valuation of environmental costs and identification of environmental and economic interdependence. Also, accounting is basically oriented towards recording of financial transactions, rather than consumption of resources, especially of the non-traded variety which environmental resources almost invariably are. Moreover, accounting rules and conventions penalize rather than encourage environmental awareness by corporate entities costs would rise, product competitiveness would be eroded, and returns to shareholders would decline. The costs imposed by a corporate entity on the society are not susceptible to accounting methods in the absence of a recognition criteria for externalities and lack of systematic and reliable methods of valuation. Moreover, while Income Statements and Balance Sheets follow an annual cycle (quarterly for listings on Stock Exchange), environmental costs and benefits are relatively invisible in the short term and acquire materiality only in a relatively long term perspective. Firms would much rather violate the law, especially if enforcement is weak as is the case in almost all developing countries. Even if we could arrive at a comprehensive reporting format for addressing environmental issues, it is possible that the cost for compiling and generating such reports could be prohibitive. A cost effective balance has therefore to be struck between financial and non-financial detail, and between rigour and simplicity.
Similar problems would arise at the nation wide aggregation which would be relevant for SAI. In a nation wide scenario for a developing economy, recognition of environmental costs could disturb global competitive advantages and work against the raising of consumption standards which are already abysmally low in terms of global averages. Besides, nation states are motivated by a desire to balance the conflicting demands of economic growth and equity; and politicians who run nations would like to win the next election. Demand for cheaper onions has therefore a natural precedence over the phasing out of commercial vehicles causing pollution. It would be presumptuous on the part of an auditor to comment adversely on a popular government which follows such a policy, unless the comment is backed by a law which sets a clear decision rule regarding long term concerns and sustainability. Auditing, in the absence of such laws, would perforce have to confine itself to compliance audits, and systems audits where environment action plans and programs are already articulated and in place. In the absence of clear disclosure norms, information for the purposes of audit will have to be collected from the data generated by statutory environmental bodies like the CPCB and the state PCBs, and from diverse Government Departments of Forestry and Wildlife, Agriculture, Soil-conservation, Transport, Energy, Mining, Urban Development, Rural Development, Water Resources, Medical and Public Health, Statistics etc. Government departments are usually very protective about the data which they collect and retain primarily for monitoring purposes, as the same may reflect adversely on their acts of omission and commission not always motivated by considerations of public interest. In the case of data which, is not part of a statutory requirement, there are usually problems of unreliability, delayed compilation, sectoral emphasis, tentative nature, weak audit trail and significant exceptions. While makeshift audits could still be performed based on such data, it is clear that the same would not be very effective in the interest of transparency and accountability. There is therefore a strong case for prescription of disclosure requirements for enabling proper environmental audits.
Disclosure norms for environment would need to be comprehensive as natural resources are interdependent. Rain forests, soil, insects, water, human life, atmosphere and the oceans are all connected. Problems of deforestation lead to problems of soil erosion and to further problems of floods, and sometimes solutions turn into problems like deserts turning into farmlands and back to deserts with excessive irrigation, or population of swamp deer, fish and frog varieties being endangered by irrigation projects. Environmental concerns also increasingly recommend a 'holistic' view of the process of economic development as opposed to a piecemeal 'reductionist' view. On the local to global dimension of space, it is difficult to know where to stop audit as environmental issues are intimately interconnected. However, stop we must in order to create viable categories for analysis and appraisal. A holistic view on the time dimension emphasizes a 'conception to resurrection' approach or the lifecycle assessment, where the entire life-cycle of a consumer product, from extraction to manufacture to use to reuse or disposal, is placed under the environmental microscope. A consumer product like the two stroke scooter will become very expensive if considerations of air pollution, fuel efficiency and the recycling limitations are integrated into the production process based on a lifecycle appraisal
Environment audits could be taken as monitoring exercises or as a means of achieving change. Under the Environment Protection Act 1986, Environment Impact Appraisals leading to environment clearance are mandatory for all major projects. An environmental protection management system has the three elements of environmental impact assessments, environmental monitoring and environmental review. Each of these three elements could include an environmental audit. A related issue in audits would be to determine the objectives that such a report would be designed to accomplish, and whether any worthwhile action or judgement could be arrived at on the perusal of such reports. For this, one could perhaps work on the analogy of shallow and deep ecology. Shallow ecology proceeds on the assumption that man is the focus of nature, while deep ecology assigns the core role to nature with human beings and biodiversity forming a part of nature. Environmental problems have arisen principally because of shallow ecological perspectives. For any meaningful redressal of environmental problems, one has to embrace a deep ecology approach in which nature and its biodiversity sustain the human species. Then there can be static and dynamic assessments of the state of the environment, corresponding to the Balance Sheet (a static assessment of financial position at a point in time) and the Income Statement (a dynamic assessment of the operating results during a period) in the case of a corporate entity.
Welford (1995) suggests a five level audit hierarchy based on the central focus of the approach at each level, and this hierarchy proceeds from a static base of compliance audits at the first level to audit for sustainability at the fifth and final level. In compliance audits, the auditor checks for compliance with legislation and the regulations made thereunder. In systems audit at the second level an environmental management plan is usually in place, and audit appraises the systems within the organisation in addition to checks related to level one. The targets and objectives at this level are largely self-determined. Both these audits are confined to specific auditee units. This is followed by environmental audit at Level three, which is a static economy wise appraisal and which takes into account interconnectivity of various sectors, protection of employees and the community, and contingency planning. Deep ecology and dynamic audit concerns follow thereafter in ecological audits at the fourth level and auditing for sustainability at the fifth and final level. While ecological audits would recognize and assert the need to live in harmony with nature, auditing for sustainability would involve creation of a social and ethical balance sheet by embodying a holistic approach to Nature. In audits at the fourth and fifth level, it is realized that Environment Audit reports could also bring out possibility of enhancing revenue collection by Governments in the form of 'polluter pays taxation', or by sale of pollution permits to check further deterioration and to finance improvements in air and water quality. The existing fiscal incentives could be evaluated from a sustainability viewpoint to determine whether or not they promote the stated policy of the Government. If clear and cost effective disclosure norms could be developed, certification of such disclosures and assessing their compliance with notified standards could be developed as the principal objectives of an environmental audit. Besides, environmental audits would help to promote awareness of environmental issues in the community, thereby helping to promote sustainable development. This in turn is likely to lead to holistic improvements in the quality of life and other social welfare indices of the community and the nation.
Environment concerns have arisen as a result of indiscriminate use of natural resources. This has promoted the concept of sustainable development which aims to recognize the costs of natural resource use, and which aims to promote intergenerational equity. SAI responsibility arises from its intrinsic duty to audit with a view to promote good governance. There is relevant expertise available with the SAI on account of its long history of conducting value for money and three E audits. As environmental degradation has already crossed threshold limits, there is a case for regular environmental audits to promote greater transparency and accountability of corporate sector and public agencies. There is a pressing need for frequent audits to highlight contingent liabilities arising from environmental degradation, as Supreme Court judgements are encouraging payment of huge amounts of compensation. Audits of the environment should not only provide an adequate warning system for environmental contingencies, but also eventually promote ecological considerations in governance. While an elementary start could be made with a view to highlight urgency and focus attention, there is requirement for a comprehensive legislation to address the issue of disclosure requirements and their audits in a systematic manner.