United States
                        Environmental Protection
                    Office of Pollution Prevention
                    end Toxic*
                    Washington, DC 20460
                        Design   for  the  Environment
October 1993
DfE project vision:
To encourage and
motivate businesses to
understand the full
spectrum of
environmental costs
and integrate these
costs in decision

DfE project objective:
To facilitate
understanding and
integration of
environmental costs
through the
development and use
of improved cost
accounting and
capital budgeting.
                               Environmental Accounting
                               and Capital Budgeting
                               Project Update #1
Background                         ;
       In late 1992, as part of its Design for the Environment (DfE)
Program, EPA began working to promote improvements in
environmental managerial accounting and capital budgeting practices.
In March 1993, the Agency published a DfE Fact Sheet which
described the initial phases of the Accounting Project (EPA/744093-
002). This is the first in a series of updates designed to inform the
public of current and upcoming project events, recent publications
and contacts. The documents, fact sheets,! and reports discussed
throughout this project update can be obtained from the Pollution
Prevention Information Clearinghouse (P1PIC) unless otherwise
indicated.                           |         ,

       The basic assumption of the Accounting and Capital
Budgeting for Environmental Costs Project is that environmental
protection and economic well-being are mutually dependent.  By
integrating environmental considerations  Into traditional business
functions, including managerial accounting and capital budgeting,
companies are more likely to see the advantages of cleaner,
prevention-oriented technologies and practices. Since EPA neither
regulates accounting and capital budgeting practices, nor has the
expertise to address them directly, the Agency has turned to outside
experts who are willing and  capable of addressing these important
issues.  This unprecedented, cooperative effort will mobilize the
expertise of the accounting,  business, academic, research,
environmental communities, and government to integrate more
explicitly environmental costs into managerial accounting and, capital
budgeting practices.                   I
       To help build momentum, EPA convened a Focus Group of
experts in a diverse group of fields to establish the vision and
objective of the project In  addition, the  Focus Group worked to
reach a consensus on the opportunities presented to businesses by
rapidly growing environmental costs and increasing public demand

for cleaner products. Specifically, the group believes that the'environmental problems we face present
many opportunities for businesses to improve their decisions by better identifying and understanding the
environmental costs of their operations. The group maintains the following assumptions:

                              -Cost accounting and capital budgeting processes
                               can be improved to more fulfy incorporate
                               environmental costs.

                              -Better information can help managers evaluate the
                               full spectrum of choices and the costs and benefits
                               of business actions that prevent pollution.

                              -Because much work is currently underway to
                               improve accounting and capital budgeting, there is
                               an unprecedented opportunity to gather this
                               expertise to stimulate an interdisciplinary dialogue.

EPA's efforts are designed to take advantage of these opportunities.


EPA's activities fall into four categories: (1) Facilitating Dialogue; (2) Developing, piloting and
disseminating tools and methods;  (3) Developing curriculum; and (4) Promoting research. EPA is
emphasizing its role as a facilitator, but will provide its environmental expertise when appropriate.  By
bringing parties together, increasing communication, raising businesses and public consciousness on     •
accounting issues, and challenging the private sector to improve its current practices, the Agency is serving
an appropriate and valuable role.  The Agency is also supporting research to better define the problem
and to test and pilot improved methods of accounting and capital budgeting.  The Agency is particularly
interested in helping small and medium-sized businesses that lack the expertise or time to change their
accounting and capital budgeting practices.  Finally, the Agency recognizes that long-term change requires
modifications in University curricula as well as training for financial, engineering, and environmental

What is EPA Doing to Promote Dialogue?

Focus Groups and the Accounting and Capital Budgeting Workshop

        During 1993, EPA held two Focus Group meetings of stakeholders, which included the following
individuals and the organizations they represent:

Philip Ameen                  Institute of Management Accountants and General Electric Corporation
Mary Bernhard                 U.S. Chamber of Commerce
DarylDitz                    World Resources Institute
William S. Garcia             American Institute of Certified Public Accountants and Union Carbide
Terri L. Goldberg           '   Northeast Waste Management Officials Association
John Hudson                  American Institute of Certified Public Accountants
Robert Hummer              American Institute of Plant Engineers and Building Technologies, Inc.

Gary Hunt                    National Roundtable of State Pollution Prevention Programs and N.C.
                              Pollution Prevention Program              j
Dorothy Kellogg               Chemical Manufacturers Association
Dick MacLean                 Arizona Public Service                    '!
John Morrow                  American Institute of Certified Public Accountants
Randy Price                   The Business Roundtable and DuPont      j
Frank Pucciano                Institute of Industrial Engineers and Georgia Power
Richard Selg                  AACE International and Westinghouse Savannah River
Christopher Stinson            University of Texas at Austin
Rebecca Todd                 New York University

        Based on its project vision and objectives, and the need  for promoting an interdisciplinary
dialogue on the issues, the Focus Group is planning a National workshop of experts in environmental
management accounting and capital budgeting. The Workshop has six co-spoiisors:

•U.S. Chamber of Commerce
•The Business Roundtable
•American Institute of Certified Public Accountants  '                   .        -
•Institute of Management Accountants                                        ,
•AACE International (Association for Total Cost Management)
•U.S. Environmental Protection Agency.                                  j
                                                                     .  i

The workshop will be held in Dallas, Texas in December,  1993.  The Focus Group developed the following
objectives for the workshop:                                             !
        •      Stimulate ongoing dialogue                                j
        •      Identify and discuss issues and potential changes/needs       ;
        •      Develop stakeholders' "Action Agenda" for improving accounting and capital budgeting
The primary audience of the workshop are members of the accounting and business communities who are
actively engaged in managerial accounting and capital budgeting  for environmental costs. The conference
is not focusing on Financial Accounting and public reporting issues. Proceedings from the workshop and
the Action Agenda will be available publicly early next year.                 j
                                                                       i •   "
Network Development and Mailings                                       | .
        EPA developed a network of more than 325 financial and environmental professionals interested
and active in accounting and capital budgeting issues.  EPA hopes the network will build momentum
around these issues and facilitate the exchange of ideas and information. To enhance the usability of the
list, EPA has sorted all network members into categories, such as industry, accounting, consultants,
academics, government officials, etc.  In addition, for those individuals who filled out EPA's "Participant
Information Form", the network list also describes what participants do and/or the services they have to
offer. If you have not already joined the network, or wish to correct or add information to your existing
listing, please complete and return the "Participant  Information Form,"  or contact PPIC to order one.
Please  feel free to copy the form and provide it to any colleagues that you  believe should be part of the
What is EPA Doing to Develop, Pilot and Disseminate Tools and Methods?

                                                                       I         .
        EPA is interested in both managerial cost accounting (information collected for internal decision
making) and capital budgeting (the process by which companies decide to invest in new capital and

equipment). To better understand managerial accounting practices, EPA is co-funding a study by the
World Resources Institute to examine existing accounting practices in a small sample of Fortune 100
companies. The study, nearing the completion of data collection, will provide facility level case studies of
accounting practices. The report, which should be available next spring, will synthesize the findings from
the case studies. In the interim, several individual case studies will be available from PPIC by December,
1993. Contact Daryl Ditz of the  World Resources Institute at (202) 662-3498 for more information about
the project.

       The American Society for Testing and Material's (ASTM's) Subcommittee on Pollution
Prevention, Reuse, Recycling and Environmental Efficiency (E50.03) is  developing a "Standard Guide for
Pollution Prevention" (Standard E.50.03.1).  EPA has funded  an effort to incorporate Total Cost
Assessment" principles into the Guide.  The draft is currently going out for second ballot  Publication is
expected in the Spring, 1994. Contact James Satterfield, Chair of the E-50.03 Subcommittee, at (215) 864-
6434 for more information.
Sharing Success Stories                               .                 .

        On a regular basis, EPA receives requests from the public for data on savings associated with
pollution prevention. Although EPA is not aware of aggregate data for national savings from pollution
prevention, the Agency knows of hundreds of examples of prevention practices that have saved money.
Finding this information can be difficult since many published case studies do not contain data on the cost
savings associated with implemented pollution prevention practices. To help interested parties locate this
information, EPA developed an annotated bibliography of sources that provide pollution prevention case
studies and created a database of case studies that contain economic information. The annotated
bibliography is now available from PPIC The database of specific case studies with economic information
will be available later this year.  Case studies available from State Pollution Prevention Programs can be
obtained directly from the States (See EPA's 1993 Reference Guide to Pollution Prevention Resources

        EPA and many of the stakeholders in managerial accounting and capital budgeting for
environmental costs recognize the need for publicly available case studies and success stories. For this
reason, EPA has been working with stakeholders to publicize examples of improvements in environmental
accounting and capital budgeting practices. If you would like EPA to help you publicize a success story,
please contact John Robison in EPA's  Pollution Prevention Division at (202) 260-3590.

What is EPA Doing in Curriculum Development?

        The National Pollution Prevention Center for Higher Education  at the University of Michigan has
developed a curriculum module on Environmental Accounting. The module provides an introduction to
the application of pollution prevention in business accounting. It is a continuously evolving resource list
of educational materials. The module  summary may be obtained  from the University of Michigan, School
of Natural Resources and Environment 430 E. University, Dana Building, Ann Arbor, MI 48109-1115; Ph:

        In addition to developing University curricula, EPA recognizes the need for curricula to train
 professionals in business and government While EPA will continue to explore the development and
 dissemination of information on curricula for business, some materials are already available through State
Technical  Assistance Programs-and Small Business Development  Centers. The Northeast Waste
 Management Officials' Association (NEWMOA) has produced training materials'for teaching the basis of

Environmental Managerial Accounting and Capital Budgeting Financial Analysis.  The curriculum,
"Costing and Financial Analysis of Pollution Prevention Investments" is available from NEWMOA at (617)
367-8558.  The Northwest Pollution Prevention Research Center has also released several video cassettes
that are available for a nominal sum.  Please see the current resource list of materials available from
organizations other than PPIC/EPA for contacts, availability and cost information.
        Recognizing the need for additional curricula and delivery mechanisms, EPA will be exploring this
issue in the coming year.  If you are aware of university curriculum that others could use or adapt, please
contact the University of Michigan at (313) 764-1412. If you are aware of curricula for business or other
professions, please contact John Shoaff at (202) 260-1831.                   |

What is EPA Doing In Research?
                                                                         I          _      '  ,
Linking Environmental Liabilities and Pollution Prevention Investment Decisions
                                                                         i           •'            -
                                 •.                                       i
        For some time now, advocates of pollution prevention have argued that companies that consider
their environmental liabilities can and will reduce those liabilities through pollution  prevention.  Although
many firms have altered their practices because of the threat of environmental liability, there has been
growing anecdotal evidence that lawyers and accountants often advise their clients not to estimate or
document any information on potential liabilities, thereby reducing the attractiveness of pollution
prevention investments. Accountants and lawyers offer this advice fearing that if potential liabilities  are
considered and documented, then businesses may be more likely to incur those; liabilities or be required to
report them to the Securities and Exchange Commission, to potential investors, and  to others.   The
result may leave businesses caught in a "Catch 22":  liability drives pollution prevention, but may also
discourage it  To explore this issue and develop a framework for addressing it, EPA funded the
Environmental Law Institute,, a not-for-profit research institute, to explore the connection between various
environmental liabilities (such as CERCLA, Criminal, Tort, etc.) and managerial decisions to prevent
pollution.  A managerial accounting framework is the filter for how managers consider liabilities in their
decision-making. A draft of the study will be available  early next year.  EPA will seek comments on
revising the draft as well as on the future direction of the project            ;

Cutting Edge  Capital Budgeting Practices
        During the last three years, EPA has developed limited data to suggest that  conventional
corporate cost accounting practices often lead to misrepresentation of the true profitability of pollution
prevention investments. Beyond this data, however, little detailed information exists on how different
types of firms have  adjusted their cost accounting practices to capture the indirect, less tangible, and
longer-term costs and savings associated with pollution prevention projects. 'Such information is essential
to refining corporate  managerial accounting practices so that they accurately capture and communicate to
decision makers relevant information.  To understand the extent to which U.S.! manufacturing firms are
utilizing financial analysis methods which incorporate "Total Cost Assessment" jconcepts, EPA is funding
the Tellus Institute, a not-for-profit research institute, to conduct a survey of "current" and "best" practices.
The study will begin this fall  and should be completed next summer.  Tellus and EPA have consulted the
Institute of Management Accountants (IMA) to coordinate this effort with their current research agenda.
For more information on the Tellus Institute's Study, contact Dr. Allen White, Director of Tellus's Risk
Analysis Group  at (617) 266-5400. For more information on IMA's current research projects, contact
Julian Freedman, the IMA's Research Director at (201)573-9000.      '    . [