CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

Traditionally, environmental issues and concerns have been seen as a constraint to businesses. This has resulted to environmental managers depending heavily on a reactive, compliance-based approach to justify certain changes. Businesses are now recognising that efficient management in the environmental area can benefit the entire firm and give room to new business opportunities for increased profits (Metcalf et al., 1996) According to the Chairman of the UK’s Advisory Committee on Business and the Environment, many businesses are discovering that environmental attention brings rewards.

Such reward can be obtained from increased competitiveness through increases in profit, from license to operate (whether from inclusion on important customers list of approved suppliers), or literally from the regulatory agencies, and generally enhanced corporate image (Jones, 1996).

Today a consumer not only does a cost benefit analysis before buying a product, rather he also analyses the actions of the company offering the product. Indian Judicial system has also started taking the companies to task if they default in any regulatory specifications issued to them. For example, Maggie was banned by a court order for a long time when it was found that it was not following the guidelines issued by Food Safety and Standards Authority of India (FSSAI), public at large also boycotted its use.

Coca Cola, which is a leading name in beverages industry, also defaulted in compliance and rather it took the guidelines for granted. Its bottling plant in Kala Dera near Jaipur was shut down after a local campaign was started by Rameshwar Kudi on grounds of depleting ground water from the area around it. After this Coca Cola has had problems in running and expanding its work in India.

Its’/ another plant in Kerela was also shut down and the plant in Varanasi was stopped in starting its expanded facility. Very recently in the state of Rajasthan in India were instructed strictly to treat the waste water before disposing it in any water body the contemplators were sealed and fined. Thereby making it very clear that the government and judiciary have joined hands to prosecute all the defaulters on charges especially concerning people at large and environmental concerns top the list. On a positive note effort made by companies towards a sustainable environment converts into better sales for the product offerings and thus increases profitability and net worth of the company.

Environmental regulations are the outcome of public concern over the effects of the industrial sector on the environment, both locally and worldwide. The general standard is requesting that companies all over the globe take responsibility for their actions. ISO 14000 is an attempt to harmonies the environmental regulations and requirements for all industries throughout the world. The standard is made voluntary, but neglecting not to meet the international standards may consequently create trade barriers (Pratt, 1997)

The International Standard Organization (ISO) developed the ISO 9000 systems to create a formal and consistent method of evaluating standards in every aspect of business, from top management to customers’ service and manufacturing. According to the controller for business development at the Hong Kong Quality Assurance Agency, many companies obtained ISO 9000 certification because they wanted to use it as a management tool to increase efficiency. Others were forced to do it, voluntarily or under pressure from customers.

They have found the importance of ISO 9000, for it can help achieve cost saving by reducing waste and the amount of re-working. While ISO took several years to gain solid grounds, ISO 14000 is likely to increase rapidly as firms in the west respond to pressure from customers to improve environmental standard. As major buyers embrace ISO 14000, they will demand that suppliers follow suit (Parry, 1996)

Environmental accounting is one of the branches of accounting which identify, measure and communicate or report environmental cost that is involved in production, it has become one of the recent important practices carried out by individual companies and by national corporations as well.

This is because it looks at how to manage the increasing environmental issues and the cost that comes with it. Environmental issues have increase rapidly within the recent past years because of heavy production to make the demands of the world’s ever-growing population and especially in environmental sensitive industries, like the mining industrial zoon.

Some of these industrial issues include pollution, Land use, waste disposal, biodiversity and destructions of water bodies. The essence, for firms to report on their social and environmental activities, practices and impacts is a demonstration of their environmental accountability to their stakeholders. (George takie 2021)

The concept of environmental accounting is an emerging and expanding one as most companies or firms are going back to check and analyses the cost of environmental issues in their organization. Also, environmental accounting has become an interesting field for researchers as stated by Hossain, Islam, and Andrew (2006).

As a way of demonstrating their accountability, many firms have responded to stakeholder concerns through voluntary and mandatory social and environmental disclosures in annual reports or in stand-alone environmental reports (Kolk & Perego, 2010).  In many countries, environmental accounting means the identification and reporting of environment specific cost such as liability cost and waste disposal costs. It is accounting for any costs and benefits that arise from change to a firm’s products and processes where the change involves a change in environmental impact (Chauchan, 2005:720).

Environmental accounting needs to work as a tool to measure the economic efficiency of environmental conservations activities and the environmental efficiency of the business activities of company on a whole. From a public perspective, poor environmental accounting means that the private sector is likely to miss investment and predict design opportunities that have ‘financial and environmental benefits.

It is widely believed that environmental accounting practices, working in organization with the private sector’s own profit motive will increase significant environmental benefits. However, environmental accounting is a broad term and more expansive when compare to the traditional accounting paradigm. It allows the taking of corrective management action to reduce environmental impacts and cost plans where appropriate. The external reporting of the environmental and financial benefits in verified corporate environmental reports or published annual reports. Thus, serving as a vital tool to assist management of our environmental risks and operational costs and for understanding the role played by the natural environment in the economy.

Willsher (2004) as cited by Osemene, Kasum and Yahaya (2012) also noted that profit of organizations could be grossly affected if the environment is neglected or inadequately taken care of. Ordinarily, any rational being or entity cannot afford be carefree with a profitable or potentially profitable venture and expect huge returns. In order words, organizations ought to account for the pollution, emissions and degradations arising because of their economic activities in to the environment. Profit should never be the only report shareholders would be eager to applaud. Reports of damages to the environment, pollution of various forms, emissions into the air, land and sea, etc. must be accounted for, rectification procedures, compensations where necessary and preventative measures to put in place are some of the items that should feature in annual reports of organizations.

Environmental accounting disclosure is essential for informing the public about an organization’s efforts to minimize environmental responsibility and maintain environmental safety. Environmental disclosure gives management a platform to account for stewardship and helps management make wise decisions. According to Ezeagba et al. (2017), environmental expenditures are expenses made for environmental protection, damage mitigation, and environmental hazard prevention.

There is a prevalent belief that expenses related to environmental preservation and conservation have an impact on business performance by lowering shareholder returns. However, Hasan and Hakan (2012), quoted by Olasupo et al. (2017), dispelled the idea that making investments in the environment will increase costs in the short term but increase profits and reduce costs over time. Environmental disclosure has been linked to the following advantages: Environmental disclosure lowers stakeholder perceptions of company risk and increases profitability through cost reductions (Amran et al., 2018). Okafor (2018) asserts that businesses with a strong sense of environmental responsibility tend to increase public trust and confidence in their operations. According to Okafor, environmental disclosure is a possible investment instrument that might provide firms with long-term financial gains. The negative effects of environmental disruptions, on the other hand, are extensive and include loss of income, job loss, permanent disability, the spread of illness, and the obliteration of human, plant, and natural resources.

1.2 Statement Of The Problem

Economic agents in Cameroon are required to take into account the integration of environmental protection features into their company’s strategy in accordance with Law No. 96/12 of the 5 August 1996 on the framework law pertaining to environmental management (Alim, 2022).

Emakponuzo and Udih (2015) attributed non-compliance around these regulations to weak infrastructure, technology deficits, high levels of corruption in society, and disputes between firms and host communities, which thus affect firms’ financial performance. Suleiman (2007) attributed it to enforcement issues. Pollution of various kinds also keeps on increasing, which frequently culminates to health hazards, disturbance of land and marine ecosystems, economic problems, and disputes between firms and host communities.

The positive revisionist theory predicts a positive link between environmental accounting disclosures performance and financial performance. McWilliams and Siegel (2001), in contrast to other schools of thinking, advocate for a neutral link between the success of environmental accounting disclosures and financial performance since enterprises that do not engage in social responsibility will have cheaper expenses and lower prices, they will also charge higher prices since their customers will be willing to pay more. Conflicting conclusions have been reached because of previous empirical research into the link between environmental accounting disclosure performance and financial performance.

Environmental accounting disclosure in manufacturing companies in Cameroon have been noticed to be deficient over time, in the sense that they lack important environmental information that will enable stakeholders make informed decisions (Nzekwu, 2009). Since the managers think that if they can identify and disclose environmental related cost, they might face some challenges, since it might bring government attention to put some restrictions on their activities. The mandatory and voluntary disclosure of financial information in corporate annual reports and their determinants have attracted considerable research attention in developed countries rather than developing ones (Akhtaruddin & Barako, 2007).

In addition, another challenging problem of environmental accounting and environmental management accounting is less definition of environmental cost, lack of willingness of managers to adopt environmental management accounting, lack of co-ordination among functional areas, lack of legal framework, inadequacy of guidelines and compulsion to adopt guideline and many others. It has also identified that the majority of management and cost accounting systems that are in placed within organisations pay little or no attention to attributing any form of environmental cost to an organisation’s operations. As a result, many environmentally incurred costs are accumulated in overhead accounts such as energy and waste costs, waste treatment costs, stationary costs, insurance from holding hazardous substances, or regulatory cost associated with particular emissions of release (Mushard & Hossain, 2019).

The only study that specifically addresses the factors influencing sustainability reporting in Cameroon is that of Dongmo and Ndjetcheu (2018), who found that businesses there still disclose economic, social, and environmental data in the absence of coercive regulatory frameworks. Their investigation of the factors influencing the voluntary sustainability reporting carried out by businesses in the OHADA sub-region was prompted by this observation. However, their study’s flaws stem from how little emphasis was placed on the environmental component of CSR. That instance, Dongmo and Ndjetcheu’s (2018) qualitative investigation put a greater emphasis on the social and economic components of CSR. Given that businesses in the service sector made up up to 38% of the sample size, their work was enlarged to include all parts of the economy rather than just the economic and social components of the triple bottom line. While earlier research indicates that industrial sector companies are more likely to provide sustainability information.

1.3 Research Questions

1.3.1 Main Research Question:

What is the effect of environmental accounting disclosure on the financial performance of manufacturing companies in littoral region of Cameroon?

1.3.2 Specific questions:       

1. To what extent does disclosure of safety measures affect firm’s returns on equity?
2. What effect does environmental protection disclosure have on a firm’s return on equity?
3. Does waste management disclosure affect a firm’s returns on equity?

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