Effect of environmental accounting implementation and environmental performance and environmental information disclosure as mediation on company value

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Mohammad Iqbal1

Ni Made Suwitri Parwati2

1.2.Tadulako University, Indonesia

This study aims to examine stakeholder theory and legitimacy as well as eco-efficient related to effect of environmental accounting implementation and environmental performance and environmental disclosure as mediation on company value. Samples are 59 companies that selected with purposive sampling technique. Analysis technique used is the Partial Least Square (PLS). Research results indicate that environmental accounting implementation is able to affect on company value, environmental accounting implementation affect on environmental information disclosure , environmental information disclosure affect on company value, environmental performance affect on company value, environmental performance affect on environmental information disclosure. However, environmental accounting implementation has not been able to affect on company value through environmental information disclosure, as well as environmental performance has not been able to affect company value through environmental information disclosure.

Keywords: Environmental Accounting Implementation, Environmental Performance, Environmental Disclosure, Company Value.

Environmental disclosure is important information regarding company's activities that conducted in an ethical manner at globalization era. This is caused by proliferation of media coverage on issue of climate change and global warming, as well as national disasters, both naturally or company negligence. This symptoms encourages greater attention to sustainability reporting, and raises questions about transparency of disclosure and role of accounting information in generating financial information relevant and reliable ([47], [10] ; 45]). This phenomenon is a serious problem that needs to be thought the solution by all parties, including accounting disciplines. On other hand, cost that must be borne by production activities have not been able to include environmental degradation and future costs [50]. This company's environmental responsibility should be one of performance indicators.

Environmental performance is needed because company legitimacy can be achieved by showing activity that accordance with local stakeholder value [39]. Based on environment context, there are two dimensions of legitimacy achievement, namely action and presentation, (1) action is an organization activity tailored to local community values, and (2) presentation related to activities carried out, whether it has met stakeholder’s expectations or not [38]. On other hand, a significant environmental problem is associated with existence of company activity ([11], [29]). It become an important environmental issue and an increase due to ever-expanding range of company stakeholders, which include customers, shareholders, potential investors, creditors, employees and general public ([20], [64], [65]).

To achieve these objectives, management uses certain techniques and procedures as well as maximum resources exploitation [62]. One main resources that exploited many companies in effort to achieve the goal is natural resources. It has been responded the academic world, including accounting profession. Accounting usage includes economic development by taking into account the consequences on environment, such as how to communicate environmental accounting information on environment impact [19].

Management of environmental costs is a top priority and interest [62]. There are several reasons for this; at least two. First, in many countries, regulations have increased significantly, even expected to be tighter again. Laws and regulations often mention penalties and huge fines, thus creating a high incentive to comply. Moreover, compliance costs can very large. Thus, company should selects of most inexpensive method to stick to main purpose. To meet this goal, compliance cost should be measured and main causes must be identified. Second, successful completion of environmental issues becomes increasingly competitive issue.

Internal system refers to organizational process that designed to improve environmental performance, including environmental audit program, vision and mission statement of environment, dealing with stakeholders, offer incentive compensation to managers and employee’s environment, as well as providing staff for environmental activities. External stakeholder relations refers to interaction between company and various external constituencies, including shareholders, local communities, government, customers, suppliers, and industry.

External impact is defined as a negative externality in business behavior. This impact is a direct consequence or second -order effects of enterprise market activities [12]. Second-order effects include the release of hazardous materials into air, water, or soil. Research links between environmental responsibility and economic performance by using pollution emissions as a proxy for responsibility ([53], [49], [7]). Internal compliance refers to how far company meets the minimum standards required by law and regulation. From social accounting and environmental performance perspective, concept of conventional profit showed a bias in performance measurement. It is because company's profit is result of a transformation process the natural resources and also potentially causes damage to environment. Conventional income concept recognizes only internal costs in an accounting period. Relying on definition of earnings (income), accounting can be seen from aspect of difference between revenue (realized revenues) derived from a transaction with a period matched historical cost [12].

Performance, in form of profit and return on investment as a measure of a company's success, is based on conventional performance indicators that contain fundamental flaws. One of them related to matching concept that not proportional between revenues and costs. Income is derived from its activities in managing resources (natural). But cost recognized is only costs incurred to acquire, transport, and processing of resources (raw materials). Company could not account for losses due to damage arising from resource extraction and its impact. It shows that companies only recognize expense related to performance or measure implementation activities to generate revenue in that period, while costs that may arise in future is a result of environmental damage with a long time horizon. It should be integrated with perceptions concerning how objects embedded in environment with respect to source of raw materials acquired, how raw materials are mass produced, and how its usage affects environment, and where community take advantage [12], [37].

Performance concept that oriented to achieve individual or group for a specific field become less relevant, because organization and accounting systems operated in context of social, political and economic. Sustainability of their existence depends on acceptance and maintenance of social approval, namely legitimacy, as stated by [35]. If the public is not satisfied with organization performance, then he or she can use pressure on company to live up to expectations or they can use the legal system to improve performance required [21].

Environmental disclosure of companies listed on Stock Exchange is still not uniform for type and items that must be presented in financial statements due to unclear regulation in SAK. Most of them are only present in images form and narrative even serving separately on websites. Research realm on environmental disclosure is expected will raise awareness for companies in Indonesia to be willing to present report in addition to mandatory voluntary reporting. Long-term environmental programs provide a more cost efficient alternative, especially to select more efficient production process and raw materials source usage that can be recycled as well as cheaper energy sources diversification. Company environmental programs can improve performance and increase investor interest. The above explanation has been proven by research of, among others, [26], [24], [3], [2], [12], [37].

Voluntary disclosures provide space for companies with other companies because each company (management) provides information that would be attractive to investors. Therefore, environmental disclosure is intended to improve information usefulness that based on management's evaluation in order company likely to deliver good news ([68], [23]). Through disclosure of company image are expected to rise and improving stakeholder’s perception, will further enhance shareholder value. Research results of [48], [4], and [16] prove the existence a strong affect between environmental performance on environmental disclosure. Some previous studies have examined relationship between characteristics of companies with environmental disclosure, either partially or simultaneously ([4], [11], [15], [6], [56]). Most of these studies results suggest links between company’s characteristics with environmental disclosures. Research diversity in this domain due to differences in analytical tools used and number of samples used. Investors in developed countries have positive awareness towards environmental disclosure that disclosure of such information (good news).

One elements of eco-control (management control system based on environment) is based on provision of data and information environments [37]. Therefore, company environmental management system can not work well without accounting process support and integrating costs into management decisions, while accounting role in environmental management system includes management of environmental costs, environmental performance evaluation have been applied, and analysis environmental impact of company activities. This is actually a function of environmental accounting and related to environmental performance [52], as demonstrated by [22], [28], with the argument that polluting companies pay three times greater for non-product output such as waste and emissions. Study [42] found that proactive environmental management is proxied by 5 indicators namely waste minimization, pollution prevention, environmental design, product excellence and full-cost accounting environmental that affect on environmental performance.

In contrast to previous studies of [56], [11], [62], [8] that more focused on accounting output variables related to characteristics of company category structure (size, leverage), performance (profitability), market-related (industry type), it is considered less effective because it has not touch realm of practice. It is very important to investigation role of environmental accounting information to steer management decisions as strategies that encourage to improve company performance in terms of environmental management. Therefore, implementation need to integrate environmental accounting and environmental performance that believed will drive efficiencies by identifying costs, classification, so do not generalize environmental costs in overhead costs that there is missing link between environmental costs that occur with responsibility products, processes, and activities that create difficulties for managers to track and control costs ([67], [31])

This study differ in some respects, but remain to include variables related to external disclosure, also integrates role of environmental accounting as a tool in internal decision making / management. Management can not perform any action relating to environment until accountant is able to identify and integrate the management decisions, in order to evaluate effectiveness of accounting-related environmental performance and environmental performance of company, which has not been studied in Indonesia. This study uses a voluntary approach / discretionary disclosure theory [16]. The reason is simply, Bapepam requires mandatory disclosure of financial statements, although such environmental liabilities for investors are regulated under Law No.25 of 2007.

This research was motivated by global and local issues emergence related to pollution and environmental damage. This has implications to company viability (going concern of entity). Capital inflows from investors outside Indonesia provide investment opportunities in real conditions in Indonesia. But on other hand, potential investors need enough information to ensure the safety of investment [56]. Businesses are increasingly face keen competition that requires companies a strategy that is more cost efficiency and improved product quality by implementing quality assurance standards or ISO 14001 and label products with guarantees of environmental friendly (eco-labeling) so that company can compete on price and quality of product.

This research purposes are to analyze the effect of environmental accounting implementation on company value, effect of environmental accounting implementation on environmental information disclosure, analyzed the affect of environmental disclosure on company value, the effect of environmental accounting implementation on company value through environmental information disclosure as well as the effect of environmental performance on company value. Furthermore, it analyzed effect of environmental performance on environmental information disclosure, effect of environmental performance on company value through environmental information disclosure.

II. Literature Review and Hypothesis Development

2.1 Effect of Environmental Accounting Implementation on Company Value

Company value is reflected in stock price. Company value has become a major concern of company owners. This is because company value indicates shareholders (investors) prosperity. Company value is measured by Tobin’s q ([20], [35], [66]). Tobin's q usage is believed to provide an overview of company's market valuation because Tobin's q is obtained from market value of equity plus the book value of debt divided by the book value of assets so that Tobin’s q gives an overview not only fundamental aspects, but also company's market valuation.

Environmental accounting implementation (X1) is identification (calculating and recording), allocation, and analysis of material flow and cost by using environmental accounting system to test their effect on environmental performance and company value [61]. Environmental Protection Agency [27]) states that environmental cost information can be used in internal management decisions. Environmental accounting is a sub- area of ​​accounting -related activity, method and system for recording and analysis [58].

Study [56] found that environmental cost information that generated by accounting environment can help to increase company value because absence of such information makes managers more accountable for costs and trying to make efforts to reduce cost. Study [44] found that by implementing environmental accounting, companies can make cost savings that improved company's performance, also [25] found that environmental accounting implementation can increase profit growth through cost reduction of annual production. As for [20] added that in addition to cost reduction, environmental accounting can also be used to indicate potential for environmentally beneficial investment to generate significant financial benefits through avoidance of environmental liability. Based on descriptions above, this research hypothesis is:

H1: Environmental accounting implementation affect on company value
2.2 Effect of Environmental accounting implementation on Environmental Disclosure

Environmental information disclosure (Y1) is a disclosure related to company's attitudes, policies or actions toward environmental impact, emissions, pollution, cleaning, planting, or energy efficiency [15]. Environmental accounting serves as a provider of environmental information to internal and external parties. Environmental accounting functions internally (Environment Management Accounting or EMA) to provide information to assist management in improving environmental performance of company, while function of external environmental accounting (Environment Financial Accounting or EFAs) is present information to external parties or company stakeholders [13], [5], [67]). Environmental information generated by environment accounting system is part of overall environmental information that disclosed by company.

Study [2] found an association between environmental accounting choices with environmental information reporting or disclosure by companies. Ability to assess and control environmental costs is associated with environmental reporting. Proactive environmental management, as measured by the minimization of waste, prevention of pollution, design environment, byproducts and full-cost environmental accounting, significantly affect company's decision to publish or not publish environmental disclosure in annual reports [43]. Presence or absence of disclosure statement is indicated by company in annual report which contains various information about environmental aspects of company [17]. External Monetary Environmental Accounting (EMEA) is used to generate information for external parties such as investors, creditors and insurance companies related to amount of funds that invest in waste treatment equipment or pollution control, potential value of insurance for equipment, and so on [13]. External Physical Environmental Accounting (EPEA) produces physical information derived from Physical Environmental Management Accounting (PEMA). Based on descriptions above, this research hypothesis is:

H2: Environmental accounting implementation affect on environmental information disclosure

2.3. Effect of Environmental Disclosure on Company Value

Information is one media to get support and manage relationships with stakeholders [33]. Meanwhile, from stakeholders perspective, they have right to get more specific information about benefit of its decision-making and company must disclose information [32]. Investors are more often associated with market -based performance measures that often referred to as economic performance and its shape is share value ([29], [49], [46]).

Management should provide and disclosing sufficient environmental information to reduce agency gap and to strengthen company's market share [4]. Information can also eliminate asymmetry information, especially if presented in a form that easily accessible and broad range as media disclosure on Internet [33]. However, environmental information disclosure in annual reports are widely used by companies because remain effective to report main source of information for investors, creditors, customers, employees, government and environmental groups ([49], [30]). More disclosure can generate greater opportunities for company to improve its reputation. Most companies present environmental information in statement of intent and purpose of company or a statement about what companies do and want [68]. The statement reflects the aim to build a good company image. Based on descriptions above, this research hypothesis is:

H3: Environmental information disclosure affect on company value

2.4. Implementation of Environmental Accounting, Environmental Disclosure and Company Value

Accountability is a company effort to transparent and responsible for activity that has been performed. Accountability is needed when company's activities affect and affected by external environment. Accounting as a accountability tool functioned as a control over a business unit activity. This can be explained by the effect of company activity quantitative on internal and external parties [1]. Accountability becomes a medium for company to build image and network of stakeholders.

Some studies as [12], [37] state the level and breadth of company information disclosure has social and economic consequences. Level of accountability and responsibility will determine the company legitimacy to external stakeholders, as well as increase company's stock transactions. Companies that making environment financial statements in sustainable manner likely will have better financial and market performance (market value) than companies that only makes conventional financial statements ([13], [1], [20]). Company will still exist when the system operates in a consistent value range with the value system of local community so company is required to operate in accordance with the value growing [2]. Consistent with [49], company purpose to do environmental disclosure is to obtain good images from stakeholders. Based on descriptions above, this research hypothesis is:

H4: Environmental accounting implementation affect on company value through environmental information disclosure

2.5 Effect of Environmental Performance on Company Value

Eco-efficiency is expressed by [51] and [9] suggested a link between environmental performance and financial performance through cost efficiencies that generated by good environmental performance. This synthesis is supported by [12] who declared that eco-efficiency to improve efficiency comes from improved environmental performance. This viewpoint is different from conventional view that assumes the efforts to improve environmental performance will actually increase cost of environment, thus causing a profits decrease. Pollution or poor environmental performance reflects a fact that resources are used less complete, less effective and less efficient; it will have an impact on lower earnings [51].

Study [64] on companies listed in Indonesia Stock Exchange found that environmental performance (measured with ISO 14001 certification, disclosure on website, disclosures in financial statements, and PROPER) affect company's financial performance (measured by ROE, ROI, EPS). According to [64], investment in waste treatment program in short term has visible impact on lower profits, but in long run it will give a good image because there is no regulatory violations and company value will rise. Environmentally friendly image and company social sensitivity is very important because competitive business world today has led to competition to build and keep the image in eyes of consumers. Based on descriptions above, this research hypothesis is:

H5: Environmental performance affect on company value

2.6 Effect of Environmental Performance on Environmental Information Disclosure

Achievement of good environmental performance is not the ultimate goal of a company. The hope is good environmental performance will increase company performance, as proposed by [20] that industry today became very concerned with environment aspects because they believe it affect on company financial report.

Companies with good environmental performance use proactive environmental strategy have an urge to inform investors and other stakeholders about their strategy through voluntary environmental information disclosure and the disclosure wide [41]. There is a positive and significant relationship between environmental performance as measured by ratio of waste recycled or TRI (toxic releases index) and level of environmental disclosure index as measured by GRI (Global Reporting Initiative) [16]. Study [62] proved that environmental performance that measured with PROPER has positive and significant impact on environmental information disclosure. Based on descriptions above, this research hypothesis is:

H6: environmental performance affects environmental information disclosure

2.7. Environmental Performance, Environmental Disclosure and Company Value

Study [41] shows there is effect between environmental performance and disclosure content. There is significant positive effect of company’s decision to disclose information on tendency of pollution generated. According to [49], companies with good environmental performance are still not affecting the extent of environmental disclosure level. Adversely, research of [4] actually found a significant positive effect between environmental performance with environmental disclosure, thus it can be interpreted that better environmental performance will create higher environmental disclosure level. This is further supported by results of [62] that environmental performance positively affects on environmental disclosure. Eco-efficiency proposed by [51] and [9] stated that there is a relationship between environmental performance and financial performance through cost efficiencies generated by good environmental performance.

Manager should change its strategy related to environmental performance, by further highlight the attention to prevention of pollution and environmental damage (pollution prevention costs), rather than on cost of handling pollution and environmental damage (pollution abatement costs) ([57], [4]). Investment in sewage treatment program for short term looked affect on earnings, but in long run it will give a good image because there are no regulatory violations and company value will increase [64].

Based on above research, it predicted that level of environmental disclosure affect on company's financial performance. Company performance is company value that based on Tobin’s q. Tobin’s q measurements has been done by previous researchers such as [66]. Performance measurement with Tobin’s q is believed to provide an overview of company market valuation, because Tobin’s q is obtained from the equity market value plus book value of debt divided by book value of assets. It shows not only on fundamental aspects, but also company's market valuation. Based on descriptions above, this research hypothesis is:

H7: Environmental performance affects on company value through environmental information disclosure

Conceptual framework is a conceptual model related to how a researcher makes a logical understanding and relationship among several factors that have been identified in a problem. Systematic theoretical framework preparation is believed will assist in hypotheses development and certain relationships test, thereby improving researchers' understanding of dynamics situation under study [59]

Eco-efficiency can explain relationship between environmental performance and company value through cost efficiency ([12], [14], [36]). This view was rejected by traditional perspective that efforts to improve environmental performance by improving business environment will decrease profits. Adversely, pollution or poor environmental performance precisely reflects resources that have not been fully used, less effective and efficient. It will lead to increased costs to address externalities, so that will have an impact on company profits [51]. However, it will different when pollution levels are reduced in accordance with regulations. Therefore companies can be categorized as efficient in handling pollution when not get sanctions that followed by reduced costs to be borne by company. For more details, conceptual framework of this research can be presented in figure below.

Figure 1. Research Conceptual Framework


X1: Environmental Accounting Implementation

X2: Environmental Performance

Y1: Environmental Information Disclosure

Y2: Company Value

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