Environmental Costs Off the Books and Accounting Accountability in State-Owned Enterprises

Demitila Okola Opetu (Universitas Negeri Yogyakarta)

The Indonesian Journal of Accounting Research
Vol 29, No 2 (2026): IJAR May 2026

Environmental costs in extractive industries are often acknowledged operationally but remain insufficiently recognized within formal accounting systems, creating accountability gaps, particularly in state-owned enterprises. This study examines why environmental costs frequently remain "off the books" by analyzing environmental cost accounting practices in Kenya's state-owned oil and gas sector. Drawing on Environmental Management Accounting (EMA), Legitimacy Theory, and Institutional Theory, the study investigates how environmental costs are recognized, measured, and disclosed, as well as the organizational and institutional factors that constrain their visibility. The research employs a qualitative single-case, interpretive design. Data were collected through semi-structured interviews with twelve purposively selected participants across finance, internal audit, operations, and environmental compliance functions, triangulated with annual reports, audited financial statements, sustainability reports, environmental impact assessments, and Auditor-General reports (2022–2024). Thematic analysis following Braun and Clarke's (2006) framework reveals three mechanisms contributing to environmental cost invisibility: recognition and measurement gaps rooted in institutional path dependencies; organizational fragmentation between environmental management and finance functions, intensified by the political governance of state ownership; and a disclosure–costing disconnect driven by legitimacy management rather than substantive accounting reform. The study contributes to environmental accounting literature by showing how weak institutionalization of environmental cost categories, shaped by isomorphic pressures, political governance, and regulatory ambiguity, structurally marginalizes environmental costs and undermines accounting accountability in state-owned enterprises. The findings carry implications for IAS 37 environmental provisions, IFRS S1 and S2 sustainability disclosure standards, integrated reporting, and the design of Environmental Management Accounting systems in extractive industries across developing economies.