The last several years appear to have brought more changes in weather, society, and the regulatory atmosphere than I can recall when I began to write the Audit & Accounting Alert nearly ten years ago. There are differing levels of agreement on some of the issues, such as the cause and impact of climate change. Nevertheless, the increased attention during this time frame to the environmental, social and governmental (ESG) aspects of financial reporting should not be a surprise. When first covering the topic in September 2012, the focus was on general concepts and seeking input for developing a framework. Since then, frameworks and detailed standards have been steadily researched and established for a variety of industries. Most recently, the American Institute of CPAs (AICPA) and Center for Audit Quality (CAQ) in February 2021 released ESG reporting and attestation: A roadmap for audit practitioners
(ESG roadmap). Also released in 2021 were the socially oriented Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes
, and the governance oriented Valuing Professional Licensing in the U.S.
Any remaining question as to the need for accurate and timely ESG reporting was dispelled when Blackrock CEO Larry Fink recently wrote in his annual letter to CEO’s:
“As more and more investors choose to tilt their investments towards sustainability-focused companies, the tectonic shift we are seeing will accelerate further…Assessing sustainability risks requires that investors have access to consistent, high-quality, and material public information…We appreciate that disclosure can be cumbersome and that the variety of reporting frameworks creates further complexity for companies. We strongly support moving to a single global standard, which will enable investors to make more informed decisions about how to achieve durable long-term returns. Because better sustainability disclosures are in companies’ as well as investors’ own interests, I urge companies to move quickly to issue them rather than waiting for regulators to impose them.”
The ESG roadmap acknowledges the trend, noting that companies, such as Vornado Realty Trust, Etsy, Inc., UBS Group AG, and others are starting to include ESG reporting or references in their SEC filings. Since SEC filings are subject to scrutiny, the inclusion of ESG content there adds credibility. Auditors need to be prepared to attest to ESG information in SEC filings and be mindful of the added risk arising from attestation.
In 2017, the AICPA issued Attestation Engagements on Sustainability Information Guide (Including Greenhouse Gas Emissions Information)
, which offered directions and illustrations of applicable procedures. The ESG roadmap takes a step back and broadens the scope in order to “provide audit practitioners…with an overview of ESG reporting and the related risk and legal considerations associated with a company’s decision to report ESG information in SEC submissions and engage an independent accounting firm to perform an attestation engagement related to such information.” Specifically, the ESG roadmap can guide the auditor when consulting with the client on questions surrounding
1. where and how to report ESG information,
2. whether to engage an independent accounting firm to perform an attestation engagement on the
ESG information, and
3. where to include the attestation report or reference such report.
The ESG roadmap explores issues including the appropriateness of the reporting, adequacy of evidence, whether internal or external criteria are employed, the level of assurance desired, and placement and expected uses of the reporting. Also covered, similar to financial reporting, is the auditor’s responsibility to evaluate consistency, comparability, completeness, and transparency, as well as the presence and maintenance of controls over the process. Specific references to regulatory provisions discuss ramifications when considering the placement of ESG reports and information in governmental filings. While the ESG roadmap is general in scope, the content will alert auditors to areas that need attention when delving into this arena.
In a further development that adds a global focus, on February 26, 2021, the International Federation of Accountants (IFAC) and the International Integrated Reporting Council (IIRC) published the first installment of a new initiative titled Accelerating Integrated Reporting Assurance in the Public Interest.
The International Integrated Reporting Framework provides a uniform format for report preparation that employs the sustainability standards. Also focusing on the assurance aspect of ESG reporting, the new initiative is another roadmap providing direction to facilitate timelier attainment of ESG goals.
Moving to the social “S” in ESG, the accounting profession is faced, much like the broader society, with the mandates of diversity. Co-sponsored by the Institute of Management Accountants (IMA) and California Society of CPAs, Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes,
studied diversity, equity and inclusion (DE &I) through surveys and interviews, assisted by research partners, the National Association of Black Accountants (NABA), Association of Latino Professionals For America, National Society of Black CPAs, and International Federation of Accountants, as well as contributions from various state CPA societies.
The study showed that the profession has a long way to go. While females in 2019 comprised over 50% of the population and 60% of the accounting workforce, only 14% were CFOs at Fortune 500 or S&P 500 companies, and only 23% were partners in CPA firms. The situation was even worse for non-white ethnic groups. Representing 38% of the population and 29% of the accounting workforce, non-whites were only 8% of the CFOs and 7% of the partners, with the Asian portion of that group making up over half of the non-white CFOs and partners, while comprising less than 6% of the overall population. Statistics on the LBGTQ+ community were not available but thought to be similarly underrepresented based on other indirect studies.
For the half of the respondents to the study who did not feel that the profession was equitable or inclusive, the primary reasons for the underrepresentation at the senior leadership levels reflected bias at all levels of the employment process. Responses were based on “firsthand observations or experience of inequitable practices and exclusive behaviors.”
With society trending toward more diversity, these statistics do not bode well for the profession, if not dealt with promptly and effectively. The profession’s commitment to high ethical standards and legal requirements alone dictate taking serious steps to address the inequities. Additionally, the study refers to other studies that show that more diversified teams “realize greater innovation and returns than less diverse counterparts.” With the current and ongoing rapid changes in the workplace and technology, the profession’s future relevance will depend on keeping pace with the social changes as well. While the situation has shown improvement in recent years, more is needed to stem the tide of prospective employees who decide not to join a firm, and frustrated current employees who leave the firm because of bias.
A good first step is awareness. An enlightening part of the study in this regard is a section where comments are shared from a diverse array of individuals at all levels of the corporate and firm structure, telling of their experiences with direct and implied discrimination, and how their careers were impeded. From there, the study describes the importance of attracting diverse talent, driving career promotion, and increasing accountability for progress, along with examples of ways to accomplish those crucial goals.
Again moving to an international stage, the Association of Chartered Certified Accountants (ACCA) on January 21, 2021 published Leading Inclusion
, reporting on responses to questions on diversity and inclusion from over 10,000 members worldwide. Since its founding in 1904, ACCA has emphasized an openness to all. The survey results indicated that 73% felt the profession was inclusive, 65% saw a connection between inclusivity and organizational success, 63% thought there still was or may be work to be done, and 54% were not sure what to do about it. Also, 63% called for ACCA to take the lead, for which the report is the first step, generating awareness. The final chapter of the report classifies organisations into five phases of diversity and inclusion, followed by insights on how to progress from basic and awareness, through understanding and application, to integration and sustainability. Most practical are the three appendices, ones for larger and smaller organisations, and for individuals. They cover strategy and leadership, culture and belonging, responsibilities, measurement and accountability, as well as ten personal actions to support the program.
The final governance “G” in ESG is where the study Valuing Professional Licensing in the U.S.
comes into play for the accounting profession. The unique franchise that licensing provides for Certified Public Accountants is the right to issue an audit examination report on an entity’s financial statements. Reacting to increasing calls in recent years for deregulation of all forms of occupational licensing, the Alliance for Responsible Professional Licensing (ARPL) commissioned Oxford Economics to prepare a research study to show the importance of responsible professional licensing to protect the interests of the public from unqualified purveyors.
A result that addresses more the social benefit was the finding that a professional license serves to reduce the compensation gap experienced by gender and ethnic minorities, as well as mobility between positions. Also, the study shows that all occupations are not equal. Some proposed deregulating legislation tends to lump all occupations together. In summary, the study “points to the fact that professional licensing of highly skilled workers should be understood and regulated separately from occupational licensing of trades and vocations. This is because:
• Its wage impact is different in size from that of lower-skill vocations;
• It appears to substantially support women and minorities move toward wage parity, and this is only true among highly skilled workers according to our model findings; and
• The level of risk and responsibilities involved in these professions calls for greater scrutiny over these roles and the repercussions of blanket deregulation for public safety and welfare could be considerable.”
As with the other aspects of ESG, accountants need to pay attention and make their voices heard to protect the special status that the CPA license bestows upon them.
Further details can be found at ESG Reporting and Attestation: A Roadmap for Audit Practitioners
, Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes
, and Valuing Professional Licensing in the U.S.
(ESG Reporting and Attestation: A Roadmap for Audit Practitioners | The Center for Audit Quality (thecaq.org)
),(Diversifying U.S. Accounting Talent: A Critical Imperative to Achieve Transformational Outcomes | IMA - The association of accountants and financial professionals working in business. (imanet.org))
, and (Homepage | Alliance for Responsible Professional Licensing (responsiblelicensing.org))