In Brief

Investors, creditors, and other users of financial information are increasingly looking beyond audited financial statements when making investment decisions. The culture in the United States and around the globe is shifting towards environmental and social issues, and reexamining how corporations are addressing these priorities. This and other non-GAAP reporting is expanding, with virtually no generally accepted guidance and little assurance. The reports are not comparable, are prepared using multiple guiding frameworks, and are generally un-audited. The accounting profession must address the relevance of these reports and the reliability of this new information.


The accounting profession is at a crossroads. The decision now is whether to be proactive and meet the needs of today’s users or to continue to limit the scope of information reporting to traditional financial statements. The combined missions of the SEC, FASB, and AICPA encompass responsibility for providing decision-useful information, guidance, and protection to investors and other users of financial information. Change is happening in the business world, not only in how entities operate, but also in which information is disseminated and used. Much of that change centers around information regarding sustainability, governance, and human capital. This type of reporting is referred to as Environmental, Social, and Governance (ESG) reporting. The SEC and FASB should consider the rapid and dynamic changes currently occurring in the business world and the necessity for new guidance. The accounting profession is well positioned to lead this change and provide the requisite direction and assurance services for the new information that investors are consuming. As Grissom et al. stated, “As integrated (ESG) reporting develops, and if the trend moves from symbolic to sustainable integrated reporting practices, accountants may begin to play a larger role in the assurance of these reports” (Sharon Grissom, Karen C. Miller, Dale Flesher, “Integrated Sustainability Reporting and External Assurance: Evidence from the Global Reporting Initiative,” Journal of Accounting and Free Enterprise, Spring 2020,

The Face of Business and Accounting is Changing

When FASB was formed, the largest businesses in the United States were in tangible industries such as automotive, oil, and steel. The market value of corporations could be measured through traditional financial statements. In contrast, today’s largest corporations are predominantly technology and process driven (Exhibit 1). In 2018, Govindarajan et al. concluded that the balance sheet and income statement “have little salience for a digital company, which often has assets that are intangible in nature and appreciate in value with use, and ecosystems that extend beyond the company’s boundaries” (“Why Financial Statements Don’t Work for Digital Companies,” by Vijay Govindarajan, Shivaram Rajgopal, and Anup Srivastava, Harvard Business Review, February 26, 2018,

Exhibit 1

The Changing Face of Business Largest U.S. Corporations 2000 vs. 2022 (Numbers in Billions)

The largest retailer in the United States owns no stores (Amazon), the largest hotelier owns no buildings (Airbnb), the largest transportation company owns no vehicles (Uber), and the largest automobile company is technology based (Tesla, which has 10 times the worth of the number two U.S. automaker, General Motors). The value of these enterprises lies largely in unreported intangible assets (Exhibit 1). The amount of reported and unreported intangible assets of the largest market cap companies in the United States has changed dramatically in the last 20 years. This data indicates that much of the value of large businesses is not currently being captured in accounting numbers—the top four businesses in the nation each have more than $1 trillion of value not captured in financial statements, with Tesla and Facebook not far behind. Some of the same companies have market values more than 20 times the asset value; this raises the question of how relevant existing financial reporting practices are.

Relevance of Traditional Financial Reporting

By reading the news or following current events—such as the trial involving Theranos, the Reddit/GameStop stock moves, record SEC fines, or the volatility of technology stocks—it is clear that investors are making decisions on information other than financial reports. Markets are reacting to tweets and comments on social media as much or more than to financial data these days. There is a change in culture and thought regarding the value of accounting information by new-age CEOs like Elon Musk who stated, “We should have fewer people doing finance and more people making stuff.”

In 2016, Baruch Lev and Feng Gu published The End of Accounting and the Path Forward for Investors and Managers. They brought forward empirical evidence on how the use of financial information has changed since the inception of FASB and demonstrated that investors are relying less on traditional financial reporting than in the past. In 2016, Lev and Rajgopal performed an additional study, interviewed dozens of top corporate executives, and concluded that “FASB must assess the mounting evidence on the ineffectiveness of current accounting and reporting regulations” ( The researchers reviewed 150 FASB statements to show that 75% had zero impact on the shares of impacted companies. They also found that CFOs in their survey “reflect a growing frustration over the increasing complexity and obscurity of financial reporting regulation.” Exhibit 2 illustrates Lev’s research on how the market is no longer reacting to quarterly earnings announcements.

Exhibit 2

Abnormal Returns from Predicted vs. Actual

The lack of attention to reliable data may be a reason that the SEC has seen a dramatic jump in enforcement actions. In 2020, they levied a record $4.68 billion in penalties and awarded whistleblowers a record $175 million, to bring the total payments to whistleblowers over $1 billion (

For more on Lev’s concepts in The End of Accounting ( and the relevance of traditional financial reporting, see the 2018 CPA Journal panel discussion with Lev and other experts (

Increasingly, the opinions of business professionals, supported by the data, indicate that financial reporting in its current form is being relied upon less than in the past, making the study of ESG reporting more pertinent.

Reliability of Non-GAAP Reporting and ESG

As the face of business has changed, so too have the types of information that is being reported and that is of interest to investors. Non-GAAP financial reporting is becoming prevalent, with companies publicizing communications on earnings before interest, taxes, depreciation, and amortization (EBITDA), for example. The other expenses besides interest, depreciation, and taxes that are being backed out in such non-GAAP measures include stock options, non-cash expenses, impairments, one-time losses, losses on asset disposal, mergers and acquisitions, and extraordinary losses.

Beyond traditional financial data and non-GAAP financial data, information on other forms of capital is becoming more relevant and desired by business information users. These forms of capital include human capital, social and relationship capital, intellectual capital, natural (environmental) capital, and big data. This is the type of information disclosed in ESG reports.

With cultural shifts occurring around the world, social issues are emerging as a top priority. Organizations and governments are challenging businesses to identify, report, and address these social issues. One such organization is the International Federation of Accountants (IFAC), which is an international professional group consisting of national member organizations such as the National Association of State Boards of Accountancy (NASBA). IFAC CEO Kevin Dancey has called for the accounting profession to lead the charge:

Accountants can help bridge the climate information gap, first to inform investors and stakeholders about the climate risks and opportunities facing the company and the financial implications, and second to navigate their companies toward climate mitigation and adaptation.


The United Nations has called for action with its 2030 Agenda for Sustainable Development ( They have issued 17 Sustainable Development Goals (SDGs), with many top U.S. corporations aligning their ESG goals and metrics to this model (see Many top companies align ESG reporting goals to the United Nations, but this does not represent a comprehensive reporting framework.

Several organizations provide more detailed guidance on ESG reporting. Exhibit 3 provides a list of major standards setting organizations with links to each organization. In November 2021, several of these organizations agreed to merge under the International Financial Reporting Standards Foundation, which will be discussed further below. Some provide principles-based frameworks while others provide more rule-based standards. None of these frameworks, however, are authoritative; they could even be viewed as competitive. The United States—through the SEC, FASB, AICPA, or any other professional organization—has yet to approve or endorse any of these frameworks or standards. The AICPA, however, does have a dedicated website with available resources (

Exhibit 3

ESG Guiding Standards Setting Organizations

Reliable or not, ESG reporting is here and growing in the amounts and types of information being reported. The Center for Audit Quality has reported that 95% of S&P 500 companies have made detailed ESG information publicly available (

All of this reporting is occurring in the absence of any authoritative guidance from the SEC. Exhibit 4 provides links to the top 15 U.S. corporations’ ESG reports and lists which ESG guidance they are using. Some companies use a guiding framework, some integrate several frameworks discussed above, while others utilize internally developed ESG reporting structures. No two reports look alike and there is little third-party review or assurance. There is still one large corporation that has not moved forward with ESG reporting—Berkshire Hathaway. At its May 2021 board meeting, Warren Buffett and his supporters shot down two resolutions supported by asset manager BlackRock that would have required ESG reporting for Berkshire Hathaway. Buffett argues that a one-size-fits-all ESG reporting standard does not make sense for a diversified company such as his (“Analysis: Buffett’s ESG Snub Risks Alienating Wall Street,” Reuters, May 4, 2021).

Exhibit 4

ESG Reporting for the Top 15 Market Cap Companies

The ISSB is Born

In June 2021, the IIRC and SASB completed a merger to combine forces under the umbrella of the Value Reporting Foundation (VRF).

Now, the International Financial Reporting Standards Foundation (IFRSF) has taken ESG reporting to the next level by reaching an agreement with the newly formed VRF and the existing Climate Disclosure Standards Board (CDSB) to combine these organizations into one global ESG standards-setting body under the IFRSF. In November 2021, the IFRSF announced the formation of the International Sustainability Standards Board (ISSB) to formulate standards to meet the needs of today’s investors ( The IFRSF announced that “The ISSB will sit alongside and work in close cooperation with the IASB, ensuring connectivity and compatibility between IFRS Accounting Standards and the ISSB’s standards—IFRS Sustainability Disclosure Standards.”

This move eases the disconnect among the competitive ESG bodies listed in Exhibit 3; however, by examining the divergent frameworks being used by the top U.S companies in Exhibit 4, more harmonization will be required to improve compatibility and reliability. Nevertheless, the creation of the ISSB is a major event that the U.S. rule-making bodies should study.


Though the authors believe Warren Buffett makes a sound point in his disapproval of ESG reporting, the movement appears to be here to stay. Through federal law (the SEC Acts of 1933 and 1934), the SEC has the ultimate authority over the information reporting of all publicly traded companies. The SEC has designated FASB as the organization to provide standards for financial accounting. The SEC has not yet done the same for ESG reporting, as of yet, but it has taken up the issue.

In May 2020, the SEC Investor Advisory Committee “approved recommendations urging the Commission to begin an effort to update reporting requirements for issuers to include material, decision-useful environmental, social, and governance, or ESG factors” (

In December 2020, the ESG Subcommittee of the SEC Asset Management Advisory Committee “issued a preliminary recommendation that the Commission require the adoption of standards by which corporate issuers disclose material ESG risks” (

In March 2021, the SEC announced that it was going to evaluate its disclosure rules on climate change to make them consistent, comparable, and reliable ( In March 2022, the SEC proposed rules to enhance and standardize climate-related disclosures for investors ( The SEC has received more than 5,000 comment letters from businesses, organizations, and prominent politicians regarding this issue and ESG reporting overall (

In reviewing these comment letters, the general themes seem to be that businesses would like flexibility and freedom, as well as guidance, from whichever framework the SEC chooses.

The SEC and the Way Forward

Although the SEC has begun its study of ESG reporting, the authors believe that a bigger, more unified vision and strategy must be pushed forward. The SEC has the power to do something similar to what the IFRSF has done with the creation of the ISSB. The SEC could designate ISSB standards as required reporting, however, by looking at the history of IFRS vs. U.S. GAAP, such a decision seems unlikely. The SEC could, however, make a similar move to that of the IFRSF and recognize the creation of a new rule-making body to sit alongside and work in close cooperation with FASB (and GASB) under the supervision of the Financial Accounting Foundation (FAF). Just as the SEC is gaining input on climate disclosure rules, it could do the same for wider-ranging ESG issues and specifically solicit input from organizations that impact the profession such as (but not limited to):

Shaping the Future

Despite the declining relevance issue of financial reporting and the emerging value of ESG reporting, traditional financial reporting will likely remain the cornerstone of corporate reporting. Currently, most ESG reports are led by investor relations departments or other areas not falling under the CFO or accounting function. Once the confusion and competition over ESG standards setting is solved, however, accountants are well-positioned to take ownership in the preparation of ESG reports and the provision of assurance services.

Financial reporting is currently being supplemented with relevant ESG reporting that, while it may be pertinent and desirable, still lacks consistency, comparability, and the reliability provided by third-party assurance. The current state of ESG reporting is ad hoc, with no generally accepted authoritative guidance and little assurance. Nevertheless, corporations are reporting this data and investors are making decisions based upon it. This poses a potential risk to investors, creditors, and other users of business information. The SEC, FASB, and the accounting profession more broadly are responsible for protecting the interests of these business information users, as well as the general public.

In the authors’ view, more needs to be done to address the current situation. When nothing is done, crisis inevitably follows, and the federal government responds with increased regulation. See, for example, the SEC Acts of the 1930s, the Sarbanes-Oxley Act of 2002 (SOX), and the Dodd-Frank Act of 2010. Now is the time for the federal government, the SEC, the accounting profession, and other capital market participants to require consistent, comparable, comprehensive, and reliable ESG reporting, from all publicly listed companies.

Craig Foltin, DBA, CPA, is an associate professor of accounting at the Monte Ahuja College of Business, Cleveland State University, Cleveland, Ohio.
Mark Holtzblatt, PhD, CPA, is an associate professor of accounting, also at Cleveland State University.

The authors gratefully acknowledge the insight of the anonymous reviewers who provided thoughtful and impactful comments and suggestions during the review process.