True Cost Accounting (by Mark Cavdar)

A corporation's financial statements are a full disclosure of the enterprise's financial activities over a fiscal period. These statements disclose the entity's collection of revenues, disbursal of costs, allocation of resources and most importantly serve as a litmus test of the venture's current financial vitality. The statements are the most important documents a corporation creates in its fiscal year, as their economic performance in the preceding period is summated and displayed in an easily digestible fashion for future investors.

A poor performance recorded in a firm's financial statements is often the first sign of impending economic troubles, and even the slightest hint of a financial downturn could prove catastrophic for the business. It goes without saying that firms will try to minimize the accumulated costs and maximize revenues, to present potential investors with a robust bottom line that resonates the firm's utmost confidence in their abilities to continue making a lot of money. Contemporary accounting, however, has passed over a crucial factor in its costing principles, one that has until recently been collectively overlooked by firms, accountants, governments, and the entirety of the industrialized world altogether: the allocation of social and environmental costs that result from the processes of business.

It doesn't take much to realize why environmental and social costs are overlooked in the accounting process; a company's period and production costs are very cut and dry, with the amount of cash invested weighed against the amount of outputs produced. How can one even begin to accurately gauge the detrimental ripple effects that a firm's waste dumping will have on a surrounding marshland? How much residual damage will an oil spill have on the clean drinking water supply? How will the clear-cutting of tropical rainforests bode for the long term survival of the surrounding ecosystems? Rather than forcing companies to address these concerns head on and find costing methods to incorporate environmental and social costs, governments have quietly turned a blind eye, allowing industrial businesses the liberty of externalizing the entirety of these environmental and social costs in a solution that conveniently works for both parties.

But with an environment that is deteriorating at a rate faster than any of our efforts are preserving it, collective reevaluation on the accountability of industrial actions is a necessity. With nearly a hundred years of overlooked externalized costs behind them, modern businesses have an advantage by way of historic precedence. Why should corporations of today have to pay for the ignorance and freewheeling of their predecessors? Why have legislative bodies overlooked this glaring problem for so long, and why isn't a monumental change already in the works?

The environment is a very touchy subject. Industrialized firms antagonize the preservation efforts of environmentalists with their rampant consumption of natural resources. While some legislation has been passed to make an effort to replace consumed resources, a firm stance must be taken in governing accounting principles of industrial environmental offenders. If a firm's continued air pollution has led to acid rain destroying acres of fertile land, hold that firm accountable.

What is proposed under the theory of true cost accounting is holding firms directly liable for the environmental travesties their production processes have precipitated. This will in turn force industrial corporations to reassess their business practices, putting environmental and social factors ahead of the accumulation of profits, the minimization of costs, and the all-important bottom line. While making such a bold statement virtually ignores the status quo of the current state of industrialized business, to amend past wrongs and start working toward a not-so-bleak future, a fundamental shift in thinking is almost a necessary prerequisite.

Current North American consumer culture blissfully ignores the social and environmental hazards that rampant consumption patterns will have in the long run. The recent and continued popularity of mammoth Sport Utility Vehicles (SUVs) has accelerated the drain on our dwindling pool of fossil fuels. Current marketing strategies show no sign in slowing the frenzied promotion of the SUV as a powerful sign of status and success. It is a proclamation of strength, bravado cast in steel and glass and stature. Hummer has even gone as far to market a tyke-friendly battery powered SUV to children, teaching them from an early age to realize what represents power and what should be ascertained if success is on the agenda later in life.

But with all these gigantic SUV engines burning fossil fuel into an atmosphere that has thinned dramatically since the 1980s, shouldn't companies that produce these environmental atrocities like General Motors, Hummer's parent company, be held responsible for finding a means to solve the problem? Or should we wait until that hole burns through the ozone layer first? Shall we avoid holding the corporation liable until we get the results back from the lab in regards to the increase in global temperature?

In General Motor's 2004 fiscal end financial statements, there was no "environmental cost" heading under the firm's current or long-term liabilities. In fact, the word environment was virtually absent from the entirety of the report. GM doesn't have to account for the damage its SUVs are causing to the air we breathe, a dodged bullet that has undoubtedly allowed the company to exist as a profitable venture for as long as it has. Yes, GM provides hundreds of thousands of jobs to workers across the globe, a necessary axis upon which the entirety of the automotive industry rests. The real benefits from the implementation of true cost accounting principles lie in the changes corporations like GM would be forced to make. In essence, incorporating social and environmental costs into business decisions would sew a conscience into the heart of the economy.

True cost accounting is a dense topic, one that is vast and open for debate. Can we really improve industrial efficiency by making corporations directly liable for their environmental missteps? Can't the same ends be achieved by simply enforcing stricter regulations from the regulatory perspective? How could we even begin to start allocating a cost to certain environmental offenses? As we race forward through the new millennium to a new era of consumption excess, these are the types of questions that should be addressed if any sort of monumental change in thinking is to occur.

Sources

Boyle, Todd. "Full Cost Accounting." AdBusters. Jan. 2005.

"True Cost Accounting." Stewardship America. 2003. 29 May 2005. <http://privatelands.org/truecost/true_cost.htm>.

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