The ESG Opportunity for CPAs? Assurance

Andrea Wright, CPA Partner, Johnson Lambert LLP
Trends in Accounting, Auditing, and Consulting

As hot as the latest TikTok trend, ESG (which stands for environmental, social, and governance) is the acronym on everyone’s lips. Whether it’s investors and investment managers talking about ESG investing, legislators and regulators pushing ESG initiatives, or stakeholders demanding more transparency via corporate ESG disclosures, you’re unlikely to read a business publication or watch a news program and not find those three letters.

While the term ESG has been floating around for many years now, it picked up speed and traction in a pandemic-era social and political climate. According to the Institute of Internal Auditors’ (IIA) white paper, “Internal Audit’s Role in ESG Reporting,” ESG is defined as “criteria that characterize an organization’s operations as sustainable, responsible, or ethical.” But while ESG is sweeping the world and appearing in headlines, there’s still a lot of work to be done before we have consistent ESG reporting requirements here in the United States and internationally.

While at least 25 countries—including Argentina, Australia, China, France, the Netherlands, the Philippines, Turkey, South Africa, and the United Kingdom—have ESG disclosure requirements, ESG reporting is still voluntary in the United States. According to a 2021 survey of 1,400 companies from 22 countries conducted by the AICPA and CIMA with the International Federation of Accountants, 91 percent said they reported some level of ESG information, and 51 percent said they had some level of assurance on that information. Among these companies, 63 percent of those with assurance engagements on the ESG information had that work conducted by audit or audit-affiliated firms. However, looking at the 100 companies within the United States that were included in this study, only 11 percent of those with ESG assurance had work conducted by an audit or audit-affiliated firm.

With ever-increasing stakeholder pressure, more organizations in the United States are reporting on ESG data, and the requisite assurance over ESG disclosures presents a major opportunity for CPAs. But there are also challenges ahead for CPAs looking to increase their market share in this rapidly growing sector, including the lack of consistency in the type of assurance needed for ESG issues. At the moment, there are multiple standards and frameworks being used to report ESG information. We CPAs have an important and exciting opportunity to leverage our skill sets and expertise to ensure the same level of reliability in ESG reporting as we bring to financial reporting. CPAs are experienced in evaluating processes and internal controls, and those skills can easily translate to measurement and reporting of ESG information.

ESG data is no different than the financial data auditors continually evaluate: The systems and processes used to accumulate the data must be reviewed to evaluate the end reporting. An ESG audit could look something like this:

An organization makes a commitment to reduce their environmental impact from business air travel through the purchase of carbon offset credits. To ensure they’re meeting this commitment, as well as accurately reporting on it (whether it be via a website, newsletter, or financial report), an audit should be performed. The audit should include validation that the right processes have been set up to record all employee air travel, collect the necessary data (miles flown, aircraft type, etc.) to calculate the carbon emissions, and purchase valid offsets.

This is just a simple example of how CPAs can audit ESG initiatives in the absence of a comprehensive reporting framework.

But CPAs soon may get comprehensive guidance. In February 2021, the AICPA released their roadmap for ESG reporting and attestation. The intent is to help tax practitioners start the conversation with their clients on how to report ESG information and what independent validation could be required in the future as regulators look to adopt reporting requirements. Additionally, the International Financial Reporting Standards Foundation is scheduled to decide whether or not to create an international sustainability reporting standards board by early fall 2021. If they create a new standards board, hopefully international reporting consistency soon follows.

While we wait to see what standards and frameworks will be created for us to leverage, we can begin having conversations with our clients about their interest in ESG reporting and assurance. In the meantime, we can utilize the resources already available through the AICPA and CIMA, as well as COSO and the IIA, to provide the ESG assurance our current and prospective clients are looking for. Perhaps most importantly, we can continue to evolve alongside the organizations we serve that care about using their influence to make the world a better place—which is even cooler than the latest TikTok trend.