CPA firms have been running hot since COVID emerged — the switch to remote work and remote monitoring, business relief activities, extended tax seasons — all these have stretched resources and made it easier to be distracted from trends and longer-term shifts that are impacting our profession, particularly the changing way investors value businesses and lenders make lending decisions.
Case in point: Environmental, social, and governance (ESG) reporting is the most consequential expansion of business information since Great Depression-era reforms led to our capital markets’ reliance on audited financial statements. That might sound like hyperbole, but it’s not — and it’s imperative CPA firms grasp this and take steps to secure their place in providing ESG advisory and assurance services.
Governments and, more importantly, the markets are driving the adoption of ESG reporting, with investors and lenders increasingly relying on financial and nonfinancial data to guide their investment and lending decisions. Research we’ve done with the International Federation of Accountants (IFAC) shows that 92% of global companies included in our study provide at least some information related to sustainability. Up to this point, however, standards have been fragmented and conventions on reporting have varied widely by region.
That’s changing. In the past year alone, we’ve seen major action with the IFRS Foundation’s establishment of an International Sustainability Standards Board (ISSB), which offers the promise of aligned global sustainability standards. Additionally, the U.S. Securities and Exchange Commission (SEC) issued its climate-disclosure rule proposal and is expected to deliver additional proposals on other aspects of ESG later this year. While these rules, if adopted, would apply mostly to larger, publicly traded companies (and there is existing controversy that may hinder adoption), it’s likely that a new focus on supply chain and vendor impacts, as well as interest from private-equity investors and lenders, will make this an area of importance for smaller businesses, too. This is a brave new world for most companies and an opportunity for firms to provide ESG advisory services to help, because — regardless of what happens — businesses will need support with internal controls, financial and nonfinancial measurement, internal and external reporting, and assurance.
With regulatory frameworks maturing, we expect an increased focus on the quality of assurance. Almost two-thirds of investors think sustainability reporting should be subject to a full audit comparable to financial statements, according to a McKinsey survey. We know from our research with IFAC that more than three-in-five ESG engagements globally are performed by audit firms. Yet the numbers are lower in key markets such as the United States, United Kingdom, and South Korea. This is our sweet spot, and we can’t let this opportunity pass us by!
Objectivity, integrity, and trust are hallmarks of the CPA profession, along with independence, professional skepticism, and commitment to quality. Because CPA firms deeply understand the companies they serve and have extensive experience in analyzing business processes, determining value, and assessing and responding to risk, these firms are well positioned to be the leading providers of ESG services. We have a strong track record of expanding our expertise into new fields — witness our success in System and Organization Controls (SOC) engagements, which involve evaluations of the integrity and controls over information systems, supply chains, and cybersecurity protections — and know when to bring in specialists for areas outside our expertise.
Preparing the profession for ESG proficiency is one of AICPA & CIMA’s key strategic goals. We’re making a strong case within the business and regulatory communities that we should be the primary providers of advisory and assurance services. And we’re committed to developing learning tools and resources to increase the profession’s competencies in this area. Looking to have a conversation about ESG assurance at your firm? Start with our brochure on the topic, as well as our guidance on ESG attestation engagements. Expect more from us later this year to help.
When it comes to providing ESG advisory and assurance, our approach should be, “If not us, who?” Our profession is built to provide these services and instill trust and integrity into the process. But it won’t just be handed to us; we need a collective sense of urgency to step forward and meet this opportunity.
Is your firm doing something noteworthy on ESG? Drop us a line and let us know. Contact Jeff May at Jeffrey.May@aicpa-cima.com.