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ZANZIBAR INSTITUTE OF FINANCIAL ADMINISTRATION

ADVANCED DIPLOMA IN ACCOUNTANCY YEAR 111

“AUDITING AND INVESTIGATION -AC33”

ENVIROMENTAL AUDITING
UNIT No FOUR

Prepared by: H.B.Hamad.

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ENVIROMENTAL AUDITING

INTRODUCTION.
Global warming, the potential impact of ecological accidents as well as the hysteria
surrounding events such as sea water pollution, Lake Victoria contamination, Mad Cow
disease underlie society's awareness and concern about the quality of the environment,
especially, corporations' role and responsibility in that regard. (For instances, does any
one has ever perform an environmental evaluation in Chwaka before and after
establishing this ZIFA. Increasing number of plastic bags around the village is one of the
best explainable example of environmental distractions) from this concern, resulted in a
significant tightening of environmental legislation in most Western countries, with
accounting regulators also getting involved through several initiatives that mandate, or
encourage, firms to disclose environmental efforts, costs and achievements in their
financial statement. Despite of its important, it is however, not given much attention in
developing counties like Tanzania regardless of its impact.
In principle, environmental auditing can be done by any person from ranges of discipline;
it can be accountant, scientist, engineers external or internal auditors or any one but most
of time it is done by multidisciplinary team so as to avoid a too strong focus on
procedures.
As the matter of facts, no one can differentiate between environmental audits from pure
financial audit. i.e. a Financial audit, With exception to environmental auditing being
largely unregulated, the general approach to both types of audits is similar. Both audits
place an emphasis on the evaluation of control systems. It is highly recommended to
include External auditors to the environmental process regardless; they are not belonging
to the organization.

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DEFINITIONS

1. Environmental audit is the audit of a business to assess its impact on the

environment.
2. Environmental auditing is the systematic examination of the interactions between
any business operation and its surroundings. This includes all emissions to air,
land and water, legal constraints, the effects on the neighboring community,
landscape and ecology and the public‟s perception of the operating company in
the local area.
3. Environmental audit is a systematic, documented and objective evaluation of the
management, organization and equipment of the facility or activity in relation to
the protection of the environment.
4. Environmental auditing is a management tool comprising a systematic,
documented, periodic and objective evaluation of how well environmental
origination, management and equipment are performing with the aim of helping to
safeguard the environmental by:
 Facilitating management control of environmental practices
 Assessing compliance with company polices, which would include
meeting regulatory requirements.
Environmental auditing has emerged as an important and integral part of environmental
management systems.
Audits serve as a management tool to help measure a company's environmental
performance against environmental regulations, as well as internal company policies and
operational procedures.
In addition, environmental audits can provide a level of assurance to senior management
that the activities at their facility or organization do not pose an unreasonable risk to the
company or the environment.
The process can assist a corporation and its officers in limiting liability by identifying
potential problems and recommending corrective actions.

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The auditing process is designed to

(1) verify compliance with corporate environmental requirements;

(2) evaluate the effectiveness of existing environmental management systems; and
(3) assess risks from regulated and unregulated materials and practices.

CORPORATE ENVIROMENTAL DISCLOSURE.

Corporate environmental disclosure is the set of information items that relate to a firm‟s
past, current and future environmental management activities and performance.
Corporate environmental disclosure also comprises:
Information about the past, current and future financial implications resulting from a
firm's environmental management decisions or actions. This information items can take
many forms, e.g., qualitative statements, quantitative facts or assertions, financial
statements' figures or footnotes. The realm of environmental disclosure encompasses the
following items: past and current expenditures or operating costs for pollution control
equipment and facilities; future estimates of expenditures or operating costs for pollution
control equipment and facilities; site restoration costs; financing for pollution control
equipment or facilities; present or potential litigation; air, water or solid waste releases;
description of pollution control processes or facilities; compliance status of facilities;
discussion of environmental regulations and requirements; environmental or conservation
policies, environmental awards or prizes; existence of environmental management or
audit departments, etc
This information can be conveyed to ultimate users especially, shareholders in almost is
three major ways:
1. Corporate voluntary disclosure.
In this context, a firm is trying to disclose its information regarding all environmental
issues undertaken or risk faced by that firm voluntarily. The potential value of voluntary
information disclosure by firms is well recognized and in theory, firms should voluntary
reveal all the information they have. They argue that if investors believe that managers
are withholding information, they will consider the undisclosed information to be

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negative and lower their estimation of the firm's value. Therefore, to avoid an unjustified
under-valuation, managers should be encouraged to voluntarily reveal all relevant
information. However, in practice, this is not the case,
Various explanations for this lack of full disclosure have been put forward. Investors
cannot determine whether managers have information; there will be no information
disclosure equilibrium. In such circumstances, managers are not motivated to reveal all
the information they have. It is however, that firms may retain some information
deliberately if its disclosure can cause a decrease in cash flows. Such costs are deemed to
be proprietary as outside parties may rely on a firm's proprietary information to inflict
damage or costs upon it (e.g., labor unions and competitors). Therefore, managers should
disclose only favorable information. Hence, investors do not know whether information
is being withheld because it is negative or because the costs likely to be incurred
following its disclosure are more important than the benefits of disclosure. In that
context, firms can withhold adverse information without its stock market value being
affected.
2. External sources of disclosure.
Rather than restricting themselves to firms' voluntary disclosure, investors can also fill
their information needs proactively by relying on financial analysts or by consulting
financial newspapers or other media. In addition, investors can also rely on other reliable
information sources, which scope and content are not under firms' control, e.g.,
disclosures mandated by legislators or regulators. However, since this approach requires
an investment of time, not all investors will resort to it, which can lead to an imbalance of
knowledge between investors. This imbalance can result in higher transaction costs,
lower trading volumes and fewer participants in the capital market. One of the
implications of this is that uninformed investors do not remain passive in the face of the
advantage held by informed investors
3. Mandatory corporate disclosure.
Here a firm is forced by some legislation to disclose its environment information to both
insiders and outsiders. Under this point, if a firm failed to disclose relevant information to
public, it will be held responsible, but this is only working in those countries whereby
environmental audit is compulsory.

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TYPES OF ENVIROMENTAL AUDITS.

In general, there are two types of environmental audits: one focusing on the
Environmental compliance status and the other on the Environmental Management
System (EMS). The former audit is simply a check on how well companies comply with
the environmental regulations and the latter checks whether the company has a system to
achieve and maintain compliance.
Environmental compliance audit
To the extent that they have been involved in environmental audits, accountants seem to
have been involved mainly in environmental compliance audits. An environmental
compliance audit is a means of observing whether the company is meeting its objectives
at the time of the audit and whether improvements can be made. Its objectives are to
verify management systems and assure environmental compliance, identify compliance
program weaknesses and define liabilities, evaluate the compliance program in an
objective manner, and enhance communications.
Environmental Management System (EMS).
An EMS provides a framework to structure and develop an environmental policy. The
main advantage of an EMS audit is to make sure that the management system ensures
compliance in the future. Because such a system is important, the ISO 14000 standards
were introduced to provide an international standard for these audits. A part of ISO
14000, ISO 14011 deals with the audit of the EMS.
EMS is a systematic process of objectively obtaining and evaluating evidence to
determine the reliability of an assertion with regard to environmental aspects of
activities, events and conditions as to how they measure to established criteria, and
communicating the results to the client, to be specific, EMS would usually be found in
large companies. An EMS in small and medium sized enterprises is also possible,
although most of these companies would be faced with the problem of too few resources
A possibility for these companies to overcome this problem is by cooperating with other
companies and trying to realize benefits such as organizational and managerial efficiency,
continuous monitoring of compliance and improvement of the enterprise‟s image This

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cooperation can consist of projects that enhance the spreading of information and
experience, thus resulting in savings of time and resources.
ADVANTAGES AND DISADVANTAGES

ADVANTAGES of Environmental audit.

1. There is a consensus that the major benefit of an environmental audit is the
subsequent reduction of the company‟s risk. By performing an environmental
audit, companies know which problems they could be facing. This enables
companies to create a competitive advantage if they understand their relation
with the environment
2. Some of the other benefits are the provision of management decision support
data, liability assurance, the creation of an additional measurement tool, better
compliance management, an aid in educating the employees, and a tool for
public relations and marketing.
The trade-off of these advantages and disadvantages will influence the decision of a
company as to whether an environmental audit will be conducted.

DISADVANTAGES of Environmental audit:

1. The cost of an environmental audit is clearly a negative aspect. The nature of an
environmental audit raises the question of who should bear the costs of the
collection and disclosure of environmental information: the company or the
stakeholders in whose interest the information is collected, and that the company
should bear the costs
2. The danger of disclosing environmental information to public is that, an
environmental audit can reveal violations of environmental rules that might affect
the company financially or can have negative consequences for its corporate
image
3. The audit might also disrupt the operations of the company, although proper
scheduling might mitigate this risk.

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4. There is an increased risk of liability if the response to the audit is insufficient or

if the environmental audit reveals several problems simultaneously, which can
cause difficulties in setting priorities.

FACTORS INFLUENCING ENVIROMENTAL AUDITING.

1. Regulations: It is believed that, Environmental laws and regulations have
an impact on the environmental audit. Most of the time people do some
thing because there is certain law or regulation behind them other wise
they will not.
2. Costs: another element that can be expected to play deceive role is the
cost associated with an environmental review or audit. It is empirical
tested that, that costs used in evaluation of company‟s environmental
destructions did not known for sure whether the costs were recovered,
which may mean that other elements play a more important role in the
decision of the company to carry out an audit.
3. Incentive compensation: the impact of incentive compensation on the
significance managers give to environmental audits. Elliott and Patton
(1998) they developed an agency model of the link between an
environmental audit and the optimal wage structure. Their main idea is
that agents have to divide their efforts between two types of task: one type
focuses on the traditional profit generating activities, and the other on
environmental protection. This distinction is relevant to the monitoring
function, in the sense that the profit-generating activities can be monitored
easily whereas the effort to protect the environment is difficult to monitor.
This provides a rationale for having environmental auditing. They
conclude that the allocation of the effort depends on the relative accuracy
of the audit. The authors state that “if the results of environmental audits
are about as reliable as those from monitoring profit-seeking activities, the
agent would split his effort evenly between environmental and financial
tasks

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4. Penalties: Existence of penalties in environmental audits is another strong

motive for a firm to conduct timely and completely environmental audit.
Mishra and others (1997) investigated penalties and the incentives for
companies to disclose information and to comply with regulations. To
verify compliance, a compliance audit is a logical tool. Mishra and
others (1997) concluded that the possibility of government agencies
accessing (voluntary) environmental reports did not have a negative
impact on the eagerness of companies to conduct an environmental
compliance audit despite the risk of „self-incrimination‟. With respect to
penalties in cases of violations of regulations, there is a distinction
between a conditional and an unconditional penalty structure. In a
conditional penalty structure, the effort to avoid environmental damage
and voluntary disclosure of such damage reduced the fine. Consequently a
conditional penalty structure had a positive influence on the willingness to
conduct compliance audits.
5. Geographical area: Some countries impose environmental reporting.
Examples include Spain, Denmark, The Netherlands, Norway, and
Sweden (Larrinaga and others 2002). The Danish type of report is similar
to an eco-balance sheet. In Spain companies are obliged to disclose
environmental information in the notes attached to financial statements.
Consequently, this information is audited as part of the audit of the
financial statements. This type of regulation extends the role of the
financial statement auditor to that of an auditor of environmental data,
although it remains unclear how these data are in fact audited and how
traditional auditing concepts such as materiality apply in this context.
BASIC STEPS IN AN ENVIRONMENTAL AUDIT.
There are three essential phases in carrying out an environmental audit. These
are
1. Planning,
2. Gathering information, and
3. Concluding the audit.

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The planning of this type of audit is just as important an activity as planning a financial
audit. For example, it is essential that the correct people are selected to carry out the
audit. The actual work carried out will most probably include compliance as well as
substantive testing, and the auditor will be required to produce a report on the work
carried out. The types of activities involved at each of these three essential stages are:
Planning stage;
 Identify the audit objectives (for example, is the purpose to check
compliance with management environmental control procedures, or to
identify inefficiencies in those procedures?)
 Define the scope of audit (the whole company or only one specific sit?)
 Determine who is the audience for the environmental audit (or example,
management, regulatory authorities, or the public)
 Obtain all relevant background information
 Determine the audit approach.
 Ascertain, evaluate and document the relevant environmental systems and
controls operating.
 Prepare a detailed audit programme.
 Select the audit team on the basis of skills and experience.
An audit cannot be designed as a ready-made package to suit all circumstances. This
framework will help you in researching and developing an audit to suit your particular
needs.
* Identify the situation, or place, in which you will audit, e.g. the school grounds, the
home kitchen, the office.
* Select the area/s or issue/s that you will audit, e.g. waste management, energy, water or
biodiversity
* Identify key questions to focus your investigation within each issue, e.g. how do we
attempt to reduce and reuse products, and recycle waste?
* For each key question identify additional questions to investigate the issue in more
detail. The Enviro Facts listed below will provide background information to help you
identify appropriate and meaningful questions. In developing these questions it is useful

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to consider the impacts of using a resource in your particular situation, and both before,
and after your situation, for example:
1. How much paper is used in the school?
2. What are the environmental effects of afforestation and paper mills?
3. What are the environmental effects of the waste paper?
* Work out remedial action, i.e. what can you do to improve the way in which resources
are used.
Issue Question Additional Enviro Facts to
questions assist
1. WASTE How do we attempt to Organic material, glass, War on waste; Pollution;
reduce and reuse paper and card, plastic, Marine pollution; Toxic
products, and recycle metals, liquids (e.g. toxic waste.
waste? wastes, oil).
2.ENERGY How do we attempt to Heaters, lights, geysers, Global warming; Energy
reduce the amount of stoves, transport options; Energy and the
energy used? environment;
Deforestation;
Desertification.
3. WATER How do we attempt to Hostel, kitchen, Precious water; Wetlands;
reduce the amount of bathrooms, school River catchments;
water used? grounds or gardens. Estuaries; Marine
Pollution, riparian pollution.
vegetation, erosion.
4.BIODIVERSITY How do we attempt to Poisons used to kill pests, Gardening for wildlife;
increase biodiversity the variety of habitats in Permaculture; Poisons in
in the grounds and the school grounds, the home and garden; Soil;
buildings? encouraging animals to Soil erosion; Plant a tree
come into the grounds, today; Indigenous, alien
use of indigenous plants and invasive; Traditional
medicine

Audit test:
 Select the items to be tested.
 Carry out detailed compliance and /or substantive testing.

Concluding.
 Post-audit research and verification of the findings from the site visit.
 Analysis of audit findings, identifying any deficiencies, discrepancies and
good performance practices.

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 Preparation of an audit report, outlining the objective and scope of the audit,
the methods employed a summary of the results, and an indication of action
areas.

The Environmental Audit Report

Role of the EA Report
The Environmental Audit Report or EA Report is a written record of the Environmental
Audit process. It describes the project or process being audited, lists the environmental
effects associated with that project or process, details the audit procedures that were
followed and identifies the relevant environmental legislation and standards that apply.
The role of the Environmental Audit Report is:
1. To provide an objective analysis of the environmental impacts arising from a
project or process.
2. To provide the information required to draw up a Comprehensive Mitigation Plan
in the event of there being any significant negative impacts on the environment.

Preparing an EA Report is a skilled task and it is unlikely that a project operator will be
able to prepare such a report to the standards required by the Environment Authority
without professional consultancy advice.
Form and Content of the EA Report
The form and content of an EA Report, as described below,
Form of the EA Report

The EA Report needs to communicate the relevant information clearly and concisely and
should therefore:
1. Be presented to make information accessible to the non-specialist, avoiding
technical terminology where possible.
2. Have information presented in summary tables and use good quality maps, charts,
Diagrams and other visual aids wherever possible.
3. Be clearly laid out with a clear table of contents, to allow the reader to find and
assimilate information easily and quickly.
4. Present information without bias and discuss issues with the emphasis appropriate
to their importance as in the overall context of the Environmental Audit.

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Content of the EA Report

The EA Report should contain the following information:

1. Introduction
The objectives and scope of the Environmental Audit.

2. Description of the Development or Activity Under Audit

The size and nature of the development or activity, a description of the relevant
management structures and workforce, a summary of all inputs and outputs, ancillary
operations such as transport and services, storage and processing operations.
3. Description of the Environment
A brief description of the surrounding including the natural and built environment, local
ecology (noting any sites of special interest or conservation value) and socio-economic or
cultural factors that may have a bearing on the audit.

4. Description of Environmental Effects

The term Effect is usually substituted in this context for the term Impact to reflect the fact
that an Environmental Audit is concerned with the effect of inefficient resource use and
processing as well environmental impacts arising from wastes and emissions.
Environmental effects related to the transport, handling, processing, storage and eventual
disposal route to the environment of all relevant inputs and outputs should be presented
systematically in a clear and appropriate manner.
They should include:
 The environmental effects observed during the course of the audit.
 The good and bad management practices that were observed during the course of
the audit, including the effectiveness of existing environmental mitigation
measures.
5. Conduct of the Audit
Those interviewed during the audit, the timing and audit methodologies used should be
presented.

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6. Evaluation of Environmental Effects

The relevant environmental legislation and standards that apply must be defined. These
should be cross referenced to the environmental effects identified in 4. Description of
Environmental Effects. The environmental effects must be systematically evaluated and
ranked in terms of their significance and the assessments of significance justified.
7. Recommendations
The EA Report must make recommendations to address any significant negative
environmental effects and, importantly, allocate and justify priorities for action.

Recommendations should include the control and reduction of emissions by improved

efficiency, management and technical control measures. The emphasis should be on
incentive and removing the source of a problem rather than the use of command and
control or “end of pipe” technology.
The Comprehensive Mitigation Plan
The Comprehensive Mitigation Plan, or CMP, is an integral part of the EA Report to
which it refers. It is an important document as it is the CMP which presents how the
recommendations made in the EA Report are going to be implemented

HELPFUL GUIDELINES
Get support! Best results are achieved when the audit has wide support, and the changes
it recommends are backed by everyone involved. Get permission for the audit from the
relevant authorities; involve as many people as possible and share the results of the audit
widely.
Don't be disappointed: Most answers to the questions will probably be "No, we don't do
this" or "No, we haven't, not yet" - the purpose of auditing is to identify where
improvements can occur, not to pass or fail the institution concerned! If a great deal of
work needs to be done, don't be daunted. Everything cannot change overnight, and
change must be manageable, so pace yourself. The audit may lead to a two month, six
month, one year or five year plan

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Review questions.
a) What is an environmental auditing? (5 marks)
b) What are the advantages and disadvantages of carrying out an environmental
auditing? (15 marks)
c) Just mention the basic factors influencing the environmental auditing. (10 marks)
(total marks=30) Thursday 17th nov. 2005 test no. one

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References:
1. Auditing and practice (second edition) by John Dunn.
2. Advanced auditing and investigation by F.M.H.Mhilu (NBAA study manual)
3. Auditing theory and practice by Hermanson, Loeb, Saada, and Strawser.
4. Auditing simplified by N.S. Saleemi
5. Auditing Questions and answers by Paul N. Manss’she.
6. Several internet sources

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