Many factors have contributed to vast changes in the corporate reporting landscape in recent years. These include accounting standards changes such as revenue recognition, leases, and credit losses. However, it’s widely recognized that financial statements and financial information alone may not tell the whole story when evaluating businesses. What do these changes mean and how can CPAs take a leadership role?
Surveying the landscape
According to a 2015 Ocean Tomo study, off-balance-sheet intangible assets in 1975 represented, on average, 17% of the market value of companies. That figure drastically increased to as much as 87% in certain sectors in 2015. Intellectual capital (including workforce “know-how”), customer relationships, brand value and confidence in the management team drive more of the value of a business today than ever before. As most of these “assets” are unrecognized on the financial statements, traditional financial metrics alone may not entirely explain the created value and the risks to the value inherent in these off-balance-sheet items.
A growing number of companies and their investors or other stakeholders are trying to better understand performance in this area through environmental, social and governance (ESG) metrics. Given the appropriate framework, these new key performance indicators may help companies and their stakeholders in their ongoing dialogue about generating sustainable, long-term value. Although there’s no single global standard-setting body, several endeavors provide such a framework. One worth noting is the Embankment Project, a joint effort of EY and the Council for Inclusive Capitalism. The final report was the result of a market-driven effort of more than 30 organizations representing all facets of market participants. Additionally, the Sustainability Accounting Standards Board (SASB) — focusing on financially material ESG topics and metrics for investors — codified industry-specific disclosure standards in November 2018.
While sustainability reports are nearly universal today among large and even medium-sized firms, they often lack relevance and reliability for investors. Furthermore, a large part of the value in tracking data is the ability to benchmark against industry averages, peer performance and internal targets. This requires a level of standardization among the company reporters, whether public or private.
Understanding the standards
SASB codified its standards in 2018 after a six-year due process involving technical research, extensive market input and public transparency in response to this need. This process included the input of hundreds of investors, preparers and other market participants. Since ESG issues represent no difference from other general business issues, a sector-specific focus was deemed important as these standards were developed.
SASB’s 77 standards enable consistent, comparable, reliable information about corporate performance on such industry-specific business drivers as:
Energy and water management
Employee engagement and labor relations
Data security and privacy
Supply chain management, and more
SASB strives to identify topics that are most likely to be financially material to investors and stakeholders in those industries. For example, where the standards address greenhouse gas emissions and water management in extractive industries, they focus on data security and business ethics in the financial sector. Companies, of course, still make the determination about materiality in their own circumstances.
Taking advantage of opportunities
As corporations have evolved and adopted more sophisticated approaches to these new ESG metrics, there’s a desire among investors and issuers to make sure that the data is high quality and reliable. Broadly, investors say that the quality of the data is more important than the location of the disclosures in terms of whether to include them in regulatory filings. There’s a need for CPAs to consider how they can help companies identify the right metrics for disclosure, help them find ways to accumulate the data to produce those metrics, build controls to enhance trust in the reliability of the information, help companies decide when, how and where to report these new metrics to their stakeholders and provide assurance over the reported ESG metrics.
It’s clear that corporate reporting is changing within and outside of financial statements. CPAs have an opportunity to be integral in the ongoing development of new corporate reporting models and participate in this evolution of the capital markets and marketplace demand.
Looking to dive right in? The AICPA’s sustainability toolkit is designed to help you meet the growing demand for sustainability reporting and assurance. The toolkit includes a brochure outlining the benefits of CPA-provided sustainability assurance; a document defining key sustainability terms; a guide to implementing the United Nations’ Sustainable Development Goals; a checklist to help organizations identify and manage environmental, social and governance-related risks; and a backgrounder on sustainability assurance. The AICPA’s sustainability assurance online course is a good place to start if you are looking to perform examination or review engagements on sustainability information. You can also learn more about sustainability reporting at the AICPA’s SEC Conference, December 9 - 11.