The use of sustainability reports for public and private companies has blossomed in the last few years. Reports run from as few as five to more than 250 pages and generally have pretty pictures, lots of verbiage as to the company’s intentions, improvements from previous years, and a future commitment to be a good corporate citizen. They indicate room for improvement and management’s intent to improve. As sustainability reporting becomes more widespread, it will increasingly encroach on territory long considered within the remit of CPAs.
Elements of Sustainability Reporting
Advocates for sustainability reporting—who have become increasingly numerous and vociferous in recent years—use many different terms, such as sustainability; good citizenship; environmental, social and governance (ESG); environmental responsibility; and responsible investing. The terms are not quite equivalent, but all address the same general concepts.
One key concept in sustainability reporting is that of stakeholders. Stakeholders include anyone currently doing business with the company or using its products, anyone living in communities where the company operates, and anyone who might be affected by the company in the future. The breadth of this definition, however, raises the question of its usefulness. Companies generally limit their reporting to investors, suppliers, employees, customers, neighbors, and governments, all of whom clearly have a “stake” in the company. Issues such as greenhouse gas emissions (GHG), however, clearly have an effect beyond those parties.
Another significant issue is “materiality,” or what is material to a stakeholder and which stakeholders are material to the company. Many sustainability reports discuss how the company has determined what is material, normally not in a quantitative manner. Because stakeholders can be defined as anything from a small number of people to all living things, materiality is an open issue, and debate as to standards continues.
Sustainability reports themselves differ significantly in quantity of statistics. Some give percentages showing improvements, such as “our use of water for each dollar of sales was down 3.7%.” Others have tables going back many years, indicating in detail the quantitative improvements being made. The reports may also address good citizenship, covering many areas that do not directly affect environmental sustainability, such as employee diversity, community involvement, human rights, women’s empowerment, charitable giving, or indigenous rights. Many also have a governance section indicating the appropriateness of their corporate controls. As with most corporate reporting, the reports are very upbeat.
Standards of Sustainability Reporting
There are a number of published standards for sustainability reports, generally referred to as “frameworks.” The Global Reporting Initiative (GRI) Sustainability Reporting Guidelines is the most commonly used. The GRI is based in Europe and has partnered with many companies and the major accounting firms. In the United States, the Sustainability Accounting Standards Board (SASB) provides standards for specific industries. In addition, at least nine other organizations have published their own sustainability frameworks.
In this author’s view, the GRI’s guidelines are the most comprehensive, with 150 different disclosures required for complete conformity. Some companies list all of them and disclose whether or why any are omitted; others just list those they are following. The companies listing the requirements give interactive cross-references to the information, including, in some cases, the Form 10-K, Proxy Statements, and similar documents. The GRI’s website indicates which companies currently use its framework.
There is no legal requirement for a sustainability report in the United States; the pressure comes from various stakeholders. In addition, some investment analysts believe very strongly in ESG issues and will only recommend investment in a company with an appropriate ESG profile. Various consumer and environmental not-for-profit entities have also sprung up that follow sustainability reporting and criticize companies that do not meet their standards. Companies themselves claim that sustainability reporting helps them monitor and measure their efforts. Furthermore, it is believed that, should an issue arise for a company from an ESG failure, the goodwill emanating from such a report could help defuse negative publicity.
CPA firms seeking future growth should investigate the niche.
The SEC has been petitioned to require ESG reporting in registrants’ Form 10-K annual filings. An article in the Accounting Policy and Practice Report (Samuel P. Gunther, Richard H. Murray, and Sheila A.S. Gunther, “The Securities Laws and the Sustainability Accounting Standards Board,” Mar. 19, 2014, http://bit.ly/21qhxzY) argues strongly against such a requirement, as the information is not related to the SEC’s investor protection mandate. In this author’s view, recent analogous reporting initiatives—the conflict minerals report and the ratio of CEO-to-median compensation ratio, both of which were required by Congress—have failed the cost-benefit test. Similar fears of topdown regulation would likely dampen corporations’ enthusiasm for mandated sustainability assurance reporting.
Assurance of Sustainability Reporting
Certain sustainability reports contain “independent assurance reports.” These assurance reports generally give negative assurance on all or parts of the sustainability reports. Some are very specific, others very general. As with sustainability reporting, there is no universal attest function guidance for these reports. Various bodies are addressing this issue and most likely will produce varying rules. The AICPA Standards for Attestation Engagements cover these activities in form, although they do not specifically address all of the disclosures in the various sustainability and ESG reports. SOP 13-1, “Attest Engagements on Greenhouse Gas Emissions Information,” gives guidance on one specific area and, the author believes, can be extrapolated to all of the sustainability and ESG reporting. An AICPA committee is further addressing the lack of attest standards in this area.
To evaluate the current use of assurance reports, this author selected and read the sustainability reports of 55 large international public companies. Of these, 20 had independent assurance reports. The assurances were equally divided between accountants (including consulting divisions) and nonaccounting firm assurance consultants. Most tellingly, there was no consistency as to the form of the assurance reporting.
All of the reports save one gave negative assurance, all roughly equivalent to those in the AICPA attest standards. One report by a non–Big Four accounting firm gave an audit opinion. Certain companies that did not have an independent assurance report had a report from an internal committee or a reference to the various consultants they had used.
The assurance reports included a variety of information, under a variety of standards:
- While there are at least 11 different frameworks, the only one frequently referred to was GRI.
- A few reports referred to internal standards, which were generally available somewhere on the company’s website.
- While many of the websites were well organized, others were quite difficult to use, making it hard to find the assurance reports.
- Some reports gave assurance that the reported GRI level of assurance was appropriate; others did not.
- Some specified exactly which statistics they were giving assurance on; others only offered very generalized assurance.
- There was a wide variety of information reported as to independence, impartiality, and competence, as well as materiality.
- Improvements from previous years and suggestions for the future were included in some reports.
- Some gave outlines of the work performed, including sample size, locations visited, and interviews; others indicated limitations as to the procedures performed.
The state of this reporting is reminiscent of financial statement audit reporting a century ago, when audit reports were highly inconsistent and included such items as subjective judgements, suggestions to management, and thanks to the client’s staff for its assistance. In a similar vein, it is clear that in some of the reports examined by this author, the assurer did not independently verify the results presented.
Nevertheless, proper sustainability assurance reporting is within the capabilities of any experienced auditing firm. While some areas, such as GHG, may require specialized knowledge, such knowledge can be obtained via specialist partners. There are several continuing education courses devoted to sustainability (e.g., from SASB) that can expand one’s knowledge base.
The Market for Sustainability Services from CPAs
Is there a market for sustainability assurance services provided by CPAs? One nonaccounting assurance consultant, according to its website, has a total volume of more than $4 billion (although it is unclear how much is for sustainability assurance reports). All of the major accounting firms dedicate significant resources to sustainability, both with regard to their internal operations and the marketing of their services. Furthermore, the AICPA in June 2015 issued a report (“The State of Sustainability Assurance and Related Services in the US: Two Market Assessments,” http://bit.ly/24iUT1p) that is moderately optimistic about the future of such services and notes that the demand has grown.
Sustainability reporting is going to continue to grow, and CPA firms seeking future growth should investigate the niche. While there are many objections to the various issues of reporting, frameworks, and investor usefulness, as well as the dogmatic beliefs of sustainability advocates, some form of sustainability reporting is here to stay, and auditors at all levels of the profession should get involved.