Ed Weinstein and Stanley Goldstein have been close friends for four decades and have agreed on almost everything. They were quite surprised a year ago to find that they differed widely on the subject of sustainability accounting. Their conversation is presented below in order to stimulate a productive intellectual discussion among other professionals who share the same questions about this new field.
Does Sustainability Represent a Business Opportunity?
Stanley Goldstein: Rarely does a door open for which we are so well-suited. If we do not do provide sustainability services, less qualified and surely less independent sources will fill the void, to the detriment of the business community and our nation. These are new services we will be called upon to provide.
We should not make getting more business a major reason for taking on sustainability. But the fact is that many of our services will wane in time, and finding new ones, where there is a fit, is just good business. I am reminded of articles in The CPA Journal on this topic, especially a piece by Sid Kess and Ed Mendlowitz (“Offering Financial Planning Services Is a Natural Progression for CPAs,” May 2015, http://bit.ly/1UjKQD4).
Others have blazed this trail, so we have a good idea of what our role should be. United Technologies Corp. (UTC) issued an annual report in 2013 including indicators of sustainability. The Sustainability Accounting Standards Board (SASB) has done enormous research in this area and created dozens of standards for industries and sectors (Diane K. Schooley and Denise M. English, “SASB: A Pathway to Sustainability Reporting in the United States,” The CPA Journal, April 2015, http://bit.ly/1TySyXF). These efforts suggest that we will be called upon to assist our clients in this area of reporting, and being prepared to do so is both an obligation and an opportunity.
Ed Weinstein: About 40 years ago, the late David F. Linowes, professor and CPA, postulated that a company’s labor force should be valued and that value disclosed in financial statements. He believed that this measurement was as important as certain assets shown in company balance sheets, but his idea never made it off the drawing board. Articles on sustainability beckon to accountants and auditors with a siren’s song that getting into the sustainability financial game will be a boon in terms of additional services to provide.
The largest accounting firms are already responding to this hypnotic song. While such involvement may prove a profitable, and even useful, client service, caution is advised. Sustainability measurements are being created using still-evolving methodology, and their worth has not yet been proven, least of all to investors. Their integration into the financial statements is problematic. Moreover, the possibility that the SEC will require sustainability information to be attested to by auditors is an illusion. The SEC has not even required attestation of management’s discussion and analysis (MD&A) disclosures in SEC filings.
This unique opportunity also represents a lot of trouble for the profession, including additional legal costs and an erosion of our brand. Yes, there are and will be additional fees—but, at this time, I believe that the risk exceeds the reward. Sustainability should be separated from financial reporting until such time as its usefulness to investors, creditors, and managers is proved and other ambiguities are resolved.
Do Non-GAAP Measures Confuse Users?
Weinstein: In the same issue of The CPA Journal that focused on sustainability, Josef Rashty and John O’Shaughnessy (“Reporting and Disclosures Using Non-GAAP Financial Measures,” March 2014, http://bit.ly/1rlrLVJ) pointed to the SEC pronouncements regarding the centrality of GAAP as promulgated by FASB. The authors noted that while the SEC “encourages companies to include relevant non-GAAP measures in their SEC filings,” the use of such data must be of equal or lesser prominence and reconciled to GAAP presentations, and management must provide reasons why it believes the non-GAAP financial measures provide “useful information to investors.”
Concern about use of non-GAAP financial information surfaced most recently in the New York Times on April 24. The financial journalist Gretchen Morgenson noted that 90% of S&P 500 companies are reporting non-GAAP financial results, something she characterized as a mammoth problem. Imagine what would happen if SASB disclosures were added.
Another article from the March 2014 Journal suggests that “disclosure requirements are transitioning from voluntary to mandatory as sustainability reporting becomes required—not only by regulators but also by stakeholders” (Denise M. English and Diane K. Schooley, “The Evolution of Sustainability Reporting,” http://bit.ly/1NXxcyN). There is no caution regarding existing regulation of non-GAAP financial information—which sustainability accounting surely is—nor is there any caution to preparers or auditors regarding use of such data in GAAP financial statements. Sustainability proponents have had no success in urging the SEC to require the disclosure of information they deem material.
Sustainability measures, like the much-trumpeted TBL, or “triple bottom line,” are confusing, and they could result in further misunderstanding if included helter-skelter in GAAP financial statements.
Do CPAs’ Professional Obligations and Duty Include Sustainability Services?
Goldstein: Our first duty is to the public. The expansion of financial reports to include all information relevant to investors and other users—including information on sustainability—is very much in the scope of the work for our clients. And I believe that no one else can do it, because only we have the necessary expertise and objectivity. But part of our professional obligation and duty is to make our firms more sustainable—we owe that to our clients, partners, and employees, and, yes, the public. As Joanne Barry has written, “We’re also looking at how we might create a more sustainable profession, one that draws a constant influx of new talent and is considered an attractive career option with diverse avenues for success. Sustainability for us means figuring out how we take the 119-year-old CPA designation into the next century” (“A Sustainable Profession,” The CPA Journal, April 2015, http://bit.ly/1NDCggZ).
Weinstein: The duty of the CPA to the public is compromised if the professional takes on that which he is not qualified to undertake. In order for the CPA to retain his well-deserved reputation, he should not try to measure that which is beyond his competence. To do so risks the reputation of the profession and the credibility of the CPA “brand.” I do not believe that CPAs have the education, training, or skills to measure or audit social and environmental matters—many of which were not even thought to be measurable until certain organizations recently began asserting otherwise.
Who Is the Client?
Weinstein: Financial reporting provides useful information to business managers, owners, investors, bankers, and creditors, the financial community (analysts, security underwriters, and traders), and regulators. The client is this user group. With the exception of regulators, all of them, in one way or another, have invested (or may invest) cash in the enterprise.
Sustainability advocates are attempting to include items that are not financial in nature and not easily quantified or measured within the financial statements.
Sustainability advocates point beyond this user group to “stakeholders,” a larger, more amorphous group. Stakeholders could presumably include anyone who breathes polluted air or drinks tainted water. While pollution and similar matters are legitimate concerns to society, there are other forums in which these matters are addressed, and other regulators who deal with them. The use of the term ‘stakeholders’ seems to be designed to suggest that others may have a useful need for financial information on subject matters not included in the financial statements. Sustainability advocates are attempting to include items that are not financial in nature and not easily quantified or measured within the financial statements—the SEC’s conflict minerals rule being a notable recent attempt (which has now been deemed violative of the First Amendment to the U.S. Constitution and is therefore void).
Our securities laws, as enforced by the SEC, expressly exist to protect investors. The securities laws are not general consumer protection statutes established to benefit stakeholders.
Is the United States Falling Behind?
Goldstein: The United States cannot fall behind the rest of the world. If you speak to businesspeople in Great Britain, Germany, South Africa, and several other countries, sustainability is integrated into their reporting systems. And this has not been crammed down the throat of the business community—it has been embraced by it. The Prince of Wales led the effort in the United Kingdom five years ago, so they are far ahead of us already.
Weinstein: This is the same tune we heard several years ago regarding IFRS. We were informed then that New York City risked losing its preeminence as the world’s financial center if we did not abandon GAAP (or substantially revise it) and move to IFRS. Even then-Mayor Michael Bloomberg and Senator Charles Schumer led the chorus.
Today, GAAP is alive and well. After about seven years and millions of dollars invested in a convergence project, it appears that quality of the GAAP standards is recognized as more important than attempting a uniform set of accounting standards throughout the world. While convergence continues, and changes were made to bring the systems closer together, it has been widely recognized that cultural, political, and other issues will not likely be overcome in the near future.
The race to incorporate the relatively unproven sustainability standards into GAAP (or into the MD&A section of Form 10-K) is similarly unlikely to reach the finish line. The fact that certain European nations have forged ahead in this area is not sufficient reason for the United States to follow. As for the sponsorship of the Prince of Wales, while his observations on any subject are welcome in the marketplace of ideas, his opinion on sustainability accounting is not that of an expert.
Is Sustainability an Intellectual Challenge or Risky Extension?
Weinstein: While we might agree that sustainability would be new territory for our profession, it is also hazardous territory. CPAs are by nature and training cautious in both how far they extend the reach of their expertise and the boundary between their qualifications and the litigious environment. CPAs are already being asked to go well beyond the accumulation of factual information. CPAs’ estimates of reserves, depreciation, timing, and countless other metrics—both in creating financial statements and auditing them—are being challenged. The extension of risk into the areas of sustainability measurement is dangerous.
Goldstein: Sustainability will be exciting new territory for our profession. If we want to attract the brightest undergraduate students on campus, we must be relevant and challenging. Yes, these are uncharted waters, but that should arouse our intellectual curiosity and bring out our creativity. q