Environmental Accounting, Social Accounting, and Governance:

A Longitudinal Study of Environmental Management Accounting in

Emerging Country

Einde Evana, Lindrianasari

, R. Weddie Andriyanto

, Yuztitya Asmaranti

Accounting Department, Faculty of Economics and Business, Universitas Lampung, Bandar Lampung, Indonesia

Keywords: Environmental Accounting, Social Accounting, Corporate Governance

Abstract: This study was conducted to investigate the long journey environmental accounting, social accounting and

corporate governance in Indonesia. The period of observation was 2004-2015, for all companies listed on

Indonesian Stock Exchange. Final data in this study were 1588. This study showed a surprising result that

was only 1.7% of companies already have accounted "environment" in their financial statements that finally

the number of environmental costs was also low. The scores of disclosure environmental and social

disclosures did not show attractive numbers either, which were respectively 7.8% and 10.2%. The

combination of environmental disclosure, social, and governance scores showed 21.5% of which was the

best figure of all aspects of measurement.

1 INTRODUCTION

This issue is particularly relevant in developing

countries because in general the regulations related

to the environment are still weak, aside from the

lack of literacy of the community related to the

environment. It is encouraged by strong curiousity

after paying attention to environmental damages

occurring in the entire area of Indonesia.

Information about environmental damages

demonstrate that (at least) the rate of deforestation

reaches 1.8 million hectares/year that causes 21% of

133 million hectares of forest in Indonesia are

disappearing and the coral reefs are damaged as

much as 30% of 2.5 million hectares

(https://alamendah. org/2014/08/01/). The Ministry

of Environment and Forestry of Republic of

Indonesia reports the quality index of environment

in Indonesia. Globally, Environmental Quality Index

(EQI) developed by Virginia Commenwealth

University (VCU) measures the quality index of

environment in six categories, which are the quality

tendency or environmental condition of media of

water, air, and land, load of toxic pollutants, bird

breeding (biodiversity), and population growth.

However, Indonesia only adopts two of six that are

introduced by VCU and added by the size of the

forest cover as the third measurement. Therefore,

recently, the measurement of quality index of

environment in Indonesia uses three indicators,

which are Air Quality Index (AQI), Water Quality

Index (WQI), and Forest Cover Quality Index

(FCQI). On average, it seems any decrease of

environment quality index in Indonesia in all

indicators of measurements. This study aims to give

an empirical evidence to entire community in

Indonesia, that without good treatment, quality of

environment in Indonesia will be worse.

Environment quality index in 2014 was 63.42 (out of

100), decreasing from 65.76 in 2011. From the side

of academicians’ awareness, this study is willing to

give practical contribution through theoretical and

empirical approaches. The result of this study shows

that as much as 1.7% from the companies that have

“environment” account in their financial report that

eventually its environment cost is low. Score of

environmental and social disclosures do not show

interesting number, each of them is 7.8% and 10.2%.

Disclosure of environment, social, and governance

shows 21.5% which is the best number from all

variables.

112

Evana, E., Lindrianasari, ., Weddie Andriyanto, R. and Asmaranti, Y.

Environmental Accounting, Social Accounting, and Governance: A Longitudinal Study of Environmental Management Accounting in Emerging Country.

DOI: 10.5220/0009898500002480

In Proceedings of the International Conference on Natural Resources and Sustainable Development (ICNRSD 2018), pages 112-117

ISBN: 978-989-758-543-2

2 LITERATURE REVIEW

2.1 Theoretical Framework

Grand theory used in this study is legitimacy theory.

Legitimacy theory explains that organization must

fulfill values in the environment where the company

operates and its emphasis on the value system in the

community (Lindblom, 1994; Suchman, 1995;

Deegan, Rankin and Tobin, 2002). Legitimacy

theory predicts that a company is able to survive if

the company is in line with the value system in

certain community where it operates. Social and

environmental issues have been explained in the

study done by Patten (1992). In his study, Patten has

introduced legitimacy theory in the book written by

Preston and Post entitled Private Management and

Public Policy in 1975. According to the book, it is

mentioned that social disclosure can be seen as a

way to respond the change of public perception

related to corporation activity. In the latest study,

Arvidsson (2010), Kamal and Deegan (2013)

explain that legitimacy theory is a relevant theory in

explaining the practice of governance as the form of

preserving/maintaining legitimacy and/or fulfilling

community expectation. The CSR practice is aimed

to avoid negative effect of company when the

company receives criticism from media. Legitimacy

theory is based on the idea that in order to keep

operating successfully, company has to take an

action in the limits of what can be received by

community (Wilmshurst and Frost (2000).

2.2 Hypothesis Development

2.2.1 Environmental Accounting Relates

Positively to Corporate Financial

Performance

Bebbington (1997) has started the development of

environmental accounting (EA) issue, by reviewing

three fields; related to the ability of EA to get

involved in corporate practice, as the strength that

enables the company to have advantage, and to

expand EA in the context of sustainable

development. Guthrie and Abeysekera (2006) stated

that environmental accounting is an interesting issue

recently, and the company reporting environmental

accounting shows good financial performance as

well. Performance reporting by combining

environmental and social reportings can give more

usefulness of information. Indeed, (for example)

institutional investors very care to information

related with social and environmental actions of

company (Aguilera, Williams, Conley and Rupp,

2006).

Potential of accounting communication in its

relation to social and environmental issues has much

been studied by researchers in developing countries.

Kuasirikun (2005) conducted evaluation of

perception among Thai accounting professionals

recently toward their attitude to social and

environmental accounting issues. Their study

expects that the change of accounting in the future

possibly will involve the change in the

characteristics of Thai accounting profession itself.

However, the regulatory requirements and voluntary

basis, CSR in Australia is better developed than

Thailand (Wisuttisak and Wisuttisak, 2016).

Lindrianasari (2007) explained that environmental

accounting is meant to report each cost of

environmental conservation activity done by

company or organization. The importance of

accounting understanding in the accounting

profession environment is sharpened by the result of

the study done by Konar and Cohen (2001) pointing

that poor numbers of environmental performance on

financial report negatively correlate to the value of

corporate intangible assets. Regnier, and Tovey

(2007), Lindrianasari (2007), Haninun et al. (2018)

found positive correlation between environmental

and financial performance, even though its benefit

can only be obtained in relatively long term on other

costs. Study conducted by Kumar (2017) on

Garments sectors in Banglades and Lindrianasari et

al. (2018) showed that corporate social

responsibility and accounting performance has a

positive relationship. However, a study conducted

by Malarvizhi and Matta (2016) showed there is no

significant relationship between environmental

disclosure and company performance. The average

of “intangible liability” for companies in sample of

study from Konar and Cohan (2001) shows as much

as $380,000,000 or around 9% of real substitution

assets. Their study concluded that toxic chemical has

a negative effect on corporate performance.

Ha1: Environmental Accounting positively

relates to corporate financial performance

2.2.2 Disclosure of Environmental and

Social Accounting Positively Relates to

Corporate Financial Performance

The study by Kuasirikun (2005) is motivated and

formed by the concern to realize the potential of

accounting communication in its relation to

environmental and social issues in Thailand. Deegan

(2002) and Deegan et al. (2002) explained that the

Environmental Accounting, Social Accounting, and Governance: A Longitudinal Study of Environmental Management Accounting in

Emerging Country

113

study of environmental and social accounting is

useful for maintaining or creating organizational

legitimacy. Wiliam (1999) studied on disclosure of

accounting and social, and succeeded to give

empirical evidence on the importance of voluntary

information disclosure related to environmental and

social accounting given by organization in annual

report. Mobus (2005) and Wiliam (1999) argued

that legal sanctions and social-political system and

economic of a country very affect the pattern of

organization perception in the needs to conduct

environmental and social accounting disclosure

voluntarily, so that it is able to fulfill community

expectation. This openness is also aimed to avoid

the policy leading to organization private interest.

Study of Mobus (2005) on industrial company of oil

refining in USA, found negative correlation between

legal sanctions related to mandatory disclosure of

environment to regulation violations. This finding

shows that the heavier legal sanctions charged

toward environment, the fewer violations occur.

The adoption of environmental accounting that is

viewed from the size of cost allocation related to

environmental conservation generally is proven to

give positive effect on corporate performance.

Regnier, and Tovey (2007) found positive

correlation between environmental and financial

performance in the level of company. However, this

performance seems to be bias in the process of

corporate investment evaluating process that is

caused by systematic difference between investment

opportunity in the field of environment and other

investments. However, investment in the field of

social and environment has been proven to have

competitive advantage (Wagner, 2007) and to be

able to provide the needs of accounting information

for manager, especially in relation to company’s

activities that affect environment generally, as well

as environmental impact on corporation (Burritt,

2004). This interrelation makes social and

environmental issues need serious and special

attention.

Ha2: Disclosure of environmental accounting

positively relates to corporate financial

performance

Ha3: Disclosure of social accounting positively

relates to corporate financial performance

2.2.3 Disclosure of Environmental, Social,

and Governance Positively Relates to

Corporate Financial Performance

Issue of Environmental, Social, and Governance

(ESG) is a new issue in the area of accounting study

(Kamal and Deegan, 2013). It seems that this issue

newly appears in the last 10 years. The researchers

are starting to focus on this issue because social and

environmental accounting are contemporary issue at

this time (Bassen and Kovács, 2008), and the

numbers of corporate scandals, social commitment,

and ethics in community are increasing, that

eventually press company to communicate corporate

information related to CSR and governance

(Arvidsson, 2010). Testing of corporate social

reporting as the form of new governance regulation

is known as “democratic experimentalism” done by

Hess (2008), by using social reporting regulation to

the approach of new governance. One governance

element is the pattern of corporate share ownership.

Aguilera et al. (2006) stated that CSR practice

relates to corporate moral. The ownership of

institutional share (Aguilera et al., 2006), ownership

of governmental share (Said, Zainuddin, Haron,

2009), ownership of foreign share (Haniffa and

Cooke, 2005) are found the pressure of its own on

the practice of CSR in the company. On the other

side, there is contradictive result on the area of

Board of Directors. Study conducted by Khan

(2010) shows that there is no significant relationship

between representations of women on boards in CSR

reporting. Meanwhile, Post, Rahman and Rubow

(2011) found that members of corporate directors

affect the implementation of environmental

governance structure and process. Empirical

evidence in the last two paragraphs shows that ESG

is a unit that cannot be separated, so it is clear that

ESG index becomes important measurement for

company. Bassen and Kovács (2008) argued that

factors of environment, social, and governance

become more significant for comprehensive

corporate evaluation. The concept of ESG proposed

by Bassen and Kovács (2008) refers to financial

material information on corporate challenge and

performance in this problem. Meanwhile, Kamal

and Deegan (2013) stated that the disclosure of

governance, social, and environmental practice

related to the context of developing country, is very

awaited by international community.

H4: Disclosure of ESG positively relates to

corporate financial performance

3 RESEARCH METHOD

This study uses all companies listed in Indonesia

Stock Exchange as its sample of study. Observation

period that will be done in this study is the year

2004-2015 (12 years). The final data of this study

ICNRSD 2018 - International Conference on Natural Resources and Sustainable Development

114

are 1588 years of companies, collected from annual

report. Data are obtained from Bloomberg database.

This study conducts investigation on the presence or

the absence of environmental fund allocation and

environmental disclosure, social disclosure, social

disclosure, as well as environmental disclosure,

social and corporate governance, and its relation to

its three dependent variables, which are revenue, net

income, and total assets, the data for dependent

variables use nominal as obtained from Bloomberg

database. Data analysis uses correlation testing

because the data for independent variables are only

dummy which 1 is for the presence of disclosure and

0 is for none.

4 FINDINGS AND DISCUSSION

Model summary testing (Table 1) evaluate model

wether it is fit or not to used in this study. The

testing result of the model generally indicates that

the model used is fit, so it is reasonable to be

analyzed further. On Table 1 it shows adjusted R

Square as much as 0.179 meaning that all variables

in the model have linkages as much as 17.9%. This

value is enough to give the meaning of the

importance of relationship one to another in one

group significance value of 0.000 with F=87.536.

Table 1: Model Summary

The result of the first hypothesis correlational

testing in this study states that environmental

accounting positively relates to corporate financial

performance, it can be seen on Table 2. On the

table, it demonstrates the relation value of

environmental cost (Envi_Cost) on revenue, total

assets (Tot_Aset) and net income (Net_Income)

consecutively is as much as 0.044*, -0.011, dan

0.069**. Meanwhile, relation significances of each

variable are 0.041, 0.327, and 0.003. The value

indicates that the relationship of environmental cost

and two out of three of financial performances

(which are revenue and net income) used in this

study testing is significant and in accordance with

what is predicted by the theory. Legitimacy predicts

that company will respond as expected by

community surrounding where the company is

located, is sufficiently confirmed.

Table 2: Statistical test



Revenue

Tot_

Aset

Net_

Income

Envi_Cost

Pearson

Correlation .044* ‐0.011 .069**

Sig. .041 .227 .003

Envi_Disc_

Score

Pearson

Correlation

.356** .111** .289**

Sig. .000 .000 .000

Soc_Disc_

Score

Pearson

Correlation .347** .141** .298**

Sig. .000 .000 .000

ESG_Disc_

Score

Pearson

Correlation .361** .245** .342**

 Sig. 0.000 .000 .000

N=1588

*Correlationissignificantatthe0.05level(1‐tailed).

**Correlationissignificantatthe0.01level(1‐tailed)

Source:DataProcessed

The result of this study shows that companies

have their concern on environment (viewed from

environmental cost allocation) relating to revenue

and net income produced from the main activity of

the company, and vice versa. However, the result of

this study found that the total assets negatively

relates to environmental cost, and vice versa. This

finding indicates that companies having lower asset

value tend to allocate environmental fund and to

have environmental costs account. Considering the

testing result that has been explained above, this

study then concluded that the first hypothesis is

supported. This result is in line with the previous

study done by Regnier, and Tovey (2007) and Konar

and Cohan (2001) that found positive relationship

between environment and financial performance.

The result of this study is also relevant with the

result of study from Guthrie and Abeysekera (2006)

finding that companies reporting environmental

accounting will have better financial performance.

However, the advantage of costs that is sacrificed for

this environment can be obtained in relatively long

term if it is compared to other costs.

The testing result of the second hypothesis

shows the result that is very relevant to what it is

predicted previously. From all correlational testings,

we found the value of variable relationship that is in

line with the theory. Consecutively, the value of

person correlation between environmental

accounting disclosure and revenue, total assets, and

net income is 0.356**, 0.111** and 0.289**. The

support of relationship significance is also shown by

Model R R Square Adj. R Square Std. error of the Estimate

1 .426a 0.181 0.179 15464446.83

a. Predictors: (Constant), Envi_Cost, Envi_Disc_Score, Soc_Disc_Score, ESG_Disc_Score

Model df Mean Square F Sig.

Regression 4 2.09342 87.536 0.000

1 Residual 1584 2.39149

Total 1584

Sum of Square

378573050323082000

83736897277254600

462309947600337000

Environmental Accounting, Social Accounting, and Governance: A Longitudinal Study of Environmental Management Accounting in

Emerging Country

115

significance of each relationship that entirely is

0.000. The result of this study shows that companies

conducting higher environmental disclosure have

relation with revenue, total assets, and net income

they have, and vice versa. This study concluded that

the second hypothesis of this study stating that

environmental accounting disclosure positively

relates to corporate financial performance can be

supported. This study is in line with the study that

had been done by previous reseachers (Wagner,

2007; Regnier, and Tovey, 2007; Wiliam, 1999).

Table 2 demonstrates the relationship value of social

disclosure (Soc_Disc_Scores) on revenue, total asset

(Tot_Aset) and net income (Net_Income) that are

consecutively as much as 0.356**, -0.111**, and

0.419**. Meanwhile, the significance relationship

for each variable consecutively is similar, which is

0.000. Statistic testing shows that the relationship of

social disclosure toward the entire financial

performances is significant. From the result we

conclude that the third hypothesis stating that social

accounting disclosure positively relates to corporate

financial performance of this study can be

supported. This result is in line with the study by

Wagner (2007) that found the presence of

competitive advantage that will be owned by

company through investment in social and

environmental field.

The fourth hypothesis of this study states that

environmental, social, and governance disclosures

positively relate to corporate financial performance.

Its statistic testing can be seen on Table 2. On the

table, it demonstrates the relation values of

environmental, social, and governance disclosures

(ESG_Disc_Scores) on revenue, total asset

(Tot_Aset) and net income (Net_Income)

consecutively are as much as 0.361**, 0.245**, and

0.342** with relation significance of all variables at

0.000. The result of the study indicates that ESG

disclosure has positive and significant relationship

on corporate financial performances used in this

study, which are revenue, total asset, and net

income. So, the fourth hypothesis of this study can

be supported and in line with the previous study by

Bassen and Kovács (2008). This result is very

interesting because from all elements measured

(environmental cost, environmental disclosure,

social disclosure, and ESG disclosure), ESG

disclosure shows the result that its relationship with

financial performance is on overage bigger.

Nevertheless, this research shows the surprising

result that is only 1.7% of companies already have

account "environment" in their financial statements

that finally the numbers environmental costs are also

low.

5 CONCLUSIONS

Overall, this study did not show the expected results,

as we found low awareness of the company's

activities and the allocation of funds for the social

and environmental. This finding has been predicted

by previous researchers (Mobus, 2005) stating that

the weaker the rule of law, the lower the

environmental performance of the country.

However, the test results indicate that the

environmental costs, the disclosure of

environmental, social disclosure and disclosure of

environmental, social and governance have a

positive and significant impact on revenue, total

assets and net income. Only the environmental costs

that are not positive and are not significant in total

assets. For the next research, researchers can use the

resources of another database for testing on this

issue in Indonesia and other countries (single

country or comparison), to make a further dan better

contribution of this issue.

ACKNOWLEDGEMENT

This research was completed using the University of

Lampung grant in 2018, in the professor's research

scheme. We thank you for this funding support.

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