The notion of sustainability is not an accounting concept, or even a business concept. Indeed, common English usage defines a sustainable entity merely as one that will endure over the long term. Sustainability professionals assert that a single home, a local community, a region, a nation, or a planet can each be assessed in terms of its sustainability. An entity that is favorably positioned to remain economically, environmentally, and socially viable over the long term is said to anticipate a sustainable future.
Sustainable value, however, is very much an accounting concept. It is analogous to equity value, and is likewise defined as the difference between asset value and liability value. But sustainable value does not adhere to GAAP definitions of assets and liabilities. Instead, it recognizes that investments in intangible assets can create long-term positive value for an organization, even if those assets are not capitalizable under GAAP. Furthermore, it recognizes that underinvestment in, or abuse of, the economic, environmental, or social resources that surround an entity can create long-term negative value, even if those contingent liabilities are not accruable under GAAP.
Indeed, sustainable value is analogous to investment concepts like intrinsic or enterprise value. Because it explicitly addresses economic, environmental, and social concerns that are external to an organization, however, it maintains a somewhat different perspective than intrinsic or enterprise value.
Four Public Accounting Examples
Consider the example of a coal mining company and its public accounting firm. In accordance with GAAP, each of the company’s projects must be assessed on an annual basis for potential litigation risk, with certain high-risk activities requiring the accrual of contingent liabilities. But what if the company does not track performance metrics in accordance with the guidelines of the Sustainability Accounting Standards Board (SASB)? What if its risk management policies and procedures are not implemented in accordance with commonly accepted industry standards? What if the attorney who prepares the annual legal contingency confirmation letter acknowledges that she is unfamiliar with those standards? Such situations may not necessarily warrant the hiring of a full-time sustainability expert for the audit staff, but they may justify the incorporation of environmental sustainability content into the continuing education activities of the audit team.
In addition, consider a manufacturer client of a public accounting firm’s mergers and acquisitions advisory practice. The company is seeking to enter the European market by acquiring a supply manufacturer in a town in eastern Germany; it then plans to merge its own small European unit into the larger target firm. But what if the firm’s small existing unit does not track its labor/management relations performance metrics in accordance with the guidelines of the Global Reporting Initiative (GRI)? What if the planned merger risks pulling the target company’s metrics below the threshold levels that are required by the relevant European Union (EU) Directives? Once again, a new full-time sustainability expert on the advisory practice’s roster may not be required. Nevertheless, the advisory practice professionals may need to become familiar with the GRI guidelines and the EU Directives regarding social sustainability.
Now consider a “big box” retailer client of a public accounting firm’s taxation practice. The company has asked the accounting firm’s tax staff to prepare an estimate of the value of a tax credit that could be earned by placing a distribution center in an inner city empowerment zone. The credit is based on a general formula that estimates the economic impact of the business on the local community; however, the law provides for the use of any alternative formula, with corresponding metrics, that is defined by “a generally recognized and commonly utilized set of standards, promulgated by a credible industry or governmental body.”
What if the retailer and the accounting firm have not employed a business professional who is aware of the metrics of United Nations Strategic Development Goal (SDG) 8, Decent Work and Economic Growth? Then the firm may be unable to help the client by proposing an alternative formula that optimizes the value of the proposed tax credit.
Finally, consider an organization that has secured a contract to build a hydro-electric power plant in an emerging nation. After obtaining authorization from the government to construct the facility, but before construction actually commences, it learns that an endangered species lives on the project site. A public controversy breaks out regarding the threat of the construction project to the native species. What if the power company and the public accounting firm have not employed a business professional who is aware of the GRI’s guidelines regarding environmental biodiversity, SASB’s renewable energy guidelines regarding community and ecological impacts, or United Nations SDGs 14 and 15 regarding life below water and life on land? The accounting firm may be unable to help its client manage this crisis situation, the project may implode, and the client may turn to other advisors who are better prepared to provide assistance.
Certified Sustainable Value Professional (CSVP) Designation
In 2017, after three years of developmental work, the Rhode Island Society of CPAs (RISCPA) launched the world’s first professional designation in sustainable value. The Certified Sustainable Value Professional (CSVP) program provides education, practice development, and professional networking services to public accountants and other professionals. It emphasizes the utilization of tools and techniques that address considerations of sustainability by focusing on practices that enhance existing lines of service in public accounting firms.
The CSVP program requires 40 hours of training per year; 24 hours are dedicated to traditional education activities during a period of six months, and 16 hours are dedicated to experiential education activities during a period of four months. Thus, participants dedicate an average of four training hours per month, across a total of 10 months.
For example, CSVP participants ended the 2017/18 year by jointly developing an integrated report for the program itself. In addition to providing the RISCPA with an assessment tool that measures and evaluates its outcomes, the hands-on activity taught CSVPs how to enhance their business planning, financial projection, forecasting, internal control, and risk management service lines.
Current CSVP participants include professionals from the federal and state government sectors; the management consulting, wealth management, and legal advisory sectors; a global financial institution; collegiate academic institutions; the private nonprofit sector; and publicly traded corporations in the United States and overseas. Interestingly, many do not hold the CPA credential, and some are not financial professionals.
Into the Future
Sustainable value is particularly relevant in situations where an entity must make a costly short-term investment in the hope of generating a long-term economic, environmental, or social return. Generally speaking, the immediate investment can be quantified with a very high degree of certainty, but the future return can only be estimated with a significant degree of uncertainty.
How can CPAs learn to address these issues? Various sources of information are available for this purpose. The Rhode Island Society of CPAs, for instance, has developed a Sustainable Value Program that sponsors continuing education courses, issues professional certificates, and maintains a professional designation in the field. [See the sidebar, Certified Sustainable Value Professional (CSVP) Designation, for additional information regarding the program.]
In the meantime, anyone wondering why CPA firms have not hired many (or any) sustainability professionals can put their minds at ease. Although sustainability factors may not have triggered many new client engagements just yet, sustainable value factors have undoubtedly affected numerous existing client services.