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A Message from the Editor-in-Chief


Richard H. Kravitz, MBA, CPA

Sustainability and sustainability reporting are still in their infancy and suffering from growing pains, such as a lack of definitional clarity, uncertainty about how to measure nonfinancial information, and confusion over new standards by new standards setters with varying ideas about what is important to disclose. Behind this movement is the inference that a more socially responsible company which practices an ethic of sustainability will carry a higher value, deliver greater permanence, and achieve long-term stability. Here, I focus on ways to define this subject from our profession's perspective—as financial executives, corporate advisors, accountants, and auditors.

We also look at entry into the sustainability field as a critically important new growth opportunity. Some members of the profession view sustainability as “the new practice development opportunity.” They realize that sustainability reporting offers innovative, creative opportunities that go beyond standard reporting: It presents entrepreneurial opportunities to develop firm expertise in this new area of practice and offers higher incremental billing opportunities. Investors and the public who seek additional non-financial information about a company will embrace the resulting reporting and disclosures.

Sustainability Redux

For a clearer definition of sustainability, I suggest the one presented by Michael Kraten in “Reimagining the Financial Statements” on page 14 of this issue). According to Kraten, sustain-ability is the nexus of financial, social, and environmental factors that impact an entity's ability to ensure its own long-term survival. Intellectual capital, workforce loyalty, and a reputation for social responsibility all represent valuable intangible assets that may not be capitalizable under GAAP but significantly impact sustainability. In order to address these factors, entities must consider an extremely broad array of stakeholders. For example, an entity's customers, supply chain vendors, local community residents, and governmental representatives all impact its reputation, and thus must all be addressed by the organization. Thus, each entity is not simply responsible for its own sustainable future. It also shares responsibility for the sustainable futures of its community and society as well. (Consider, for example, the complicated interrelationships between General Motors and its suppliers, labor unions, and the city of Detroit.)

If you prefer, a second definition focuses on accounting and balance sheet reporting—or what I might characterize as the “unbalance sheet.” According to this approach, most of a corporate enterprise's value is not on its books. As accountants and auditors, “what is counted often does not matter, and what matters is often not counted.” This approach suggests that the most important assets and the most important liabilities are not recorded on the balance sheet of any enterprise—for example, an entity's intellectual property, brand equity, patents, trademarks (other than those acquired), inventions, goodwill, historical reputation, critical mass, R&D, and quality of management.

Similarly, the most important liabilities, the ones that can seize markets and lead to global crises (e.g., inadequate reserves to cover liquidity crunches, derivatives, off-balance sheet financing, repurchase agreements with no reserves booked against them, investments in offshore subsidiaries, minority ownership of entities) often do not appear on the balance sheet. Neither, for that matter, do the transactions in between quarters that tighten up quarterly reporting. Could these categories of liabilities be measured in terms of their risk to an enterprise's sustainability?

A third definition of sustainability is best explained by example. Most readers would agree that wind and solar power represent the greenest sustainable energy sources—but are the companies that provide this power economically sustainable? What happened when government subsidies lapse? What happens when oil prices collapse, as they have recently (dropping from nearly $100 per barrel to less than $50 in less than a year)?

A fourth and final definition of sustainability is suggested by Thomas Friedman in Hot, Flat, and Crowded 2.0, wherein the author describes companies who “Practice an ethic of sustainability … institutions that are too good to fail and too strong to fail—not institutions that are too big to fail.” As CPAs, the largest independent outside observers of corporate behavior, we are naturally in the best position to observe and report on “good companies” and their sustainable practices. But how is a “good company” defined? Take, for example, Fannie Mae and Freddie Mac, formed during the Great Depression to help ensure that every American could afford a home—what most consider to be a “good” mission. Why did these enterprises prove to be unsustainable in the long run?


The first article on sustainability reporting that I can find published by The CPA Journal was written by Maef Woods and appeared in June 2003. It chronicled the birth of Global Reporting Initiative (GRI), the first not-for-profit entity established in this space, which in 2002 opened its doors in Amsterdam as the official center of the United Nations Environmental Programme. The article focused on GRI's charter, sustainable development, sustainability performance measures and triple bottom line reporting (TBL), an accounting framework that strives for financial, social, and ecological benefits. In 2008, the Journal first began covering socially responsible investing, and suggesting how CPAs acting as corporate financial advisors and financial executives could assist in identifying, measuring, and evaluating the investment returns of socially responsible companies.

Fannie Mae and Freddie Mac's 75:1 leverage, five times the average leverage of other financial services entities at that time, ultimately drove them into bankruptcy (The Financial Crisis Inquiry Commission Report, January 2011). At what point in their history might we auditors have concluded that there was reason for concern? Could CPAs have opined on the sustainability of this entity? And if so, would we have been correct?

Sustainability Assurance?

The fundamental question and the ensuing debate is whether, in our current environment of regulatory overload, can CPAs, or any other professional, with any degree of certainty or competency, assure the public and the investors that a company is a sustainable enterprise? As corporate financial advisors, financial executives, or corporate auditors, do we have the knowledge, training, tools, and techniques to develop a sustainability reporting model (notwithstanding the legal liability issues)? Can CPAs own this valuable niche? There are compelling arguments on both sides.

On one side, consider the question of whether an entity can sustain itself for another year—whether it is a going concern. CPA Journal Editorial Board Member Arthur Radin argues that “auditors should not be required to evaluate whether a client is a going concern … auditors are historians of past events and not predictors of future ones” ("Should Auditors Opine on Going Concern?" CPA Journal, October 2013). Radin's article discussed FASB's redeliberation of the going concern standard (SAS 59) that was put in place more than a quarter-century ago. If one accounting standards setter is still refining this concept, what can we expect as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and other aspiring sustainability standards setters try to expand the concept along a much longer time horizon.

On the other side of the Atlantic, a more expansive view of accountants' skill set and competencies to perform TBL reporting and opine on sustainability issues prevails. Last year, all of the major accounting firms that audited publicly traded companies in the United Kingdom participated in a program to substantially increase and improve reporting on nonfinancial information. The U.K. Financial Reporting Council's extended auditor's report, “A Review of Experience in the First Year,” published in March 2015, highlighted examples of 153 extended audit reports, ranging from small-cap companies to large-cap, FTSE-traded companies. We will cover this report fully in an upcoming issue. The information reported ranged from assessing going concern risk to geopolitical risk, environmental risk, and social risk [see page 37 of the report at https://www.frc.org.uk/Our-Work/Publications/Audit-and-Assurance-Team/Extended-auditor-s-reports-A-review-of-experience.pdf). Other reported factors regarding sustainability included geographic risk and enterprise risk resulting from such factors as an economic slowdown or high consumer debt levels. The audit reports even ventured in economic forecast models and sector analyses.

Weighing in on the Debate

The issue of sustainability, still in its infancy, is critically important to our readers, their clients, and companies. The debate over CPAs' role assuring sustainability will be covered in the pages of the CPA Journal. The art of identifying a sustainable company suffers from a lack of clarity in definitions and lack of models to follow. Definitions vary, and no one can provide long-term guidance for the young companies who aim to be successful sustainable businesses. Still, the early adopters within our CPA community who embrace this opportunity may potentially find it a successful practice niche in the very near future.


What if, in the development of sustainability standards, we tried to avoid the complexity that has come to plague accounting standards? I think the first step would be to choose a single regulatory authority among those currently competing for acceptance. Unless, of course, the standards setter we didn't choose offered some compelling alternatives, in which case its standards could be adopted as an alternate. Of course, we might be compelled by legal challenges to refine the standards to an increasing level of specificity. And accommodating the wishes of legislators and regulators would require the establishment of an overall oversight committee on sustainability standards setting organizations (OOCOSSSO, for short). And to accommodate international businesses, we would have to look to international sustainability standards setters. Now we would need to converge our U.S. sustainability standards with those international standards, starting with a conceptual framework and rewriting the standards to fit—it might take a Sustainable Oversight Board to manage a process of this magnitude. Such a foundation would surely want to ensure its own sustainability and continually refine the standards it already developed, in the pursuit of an ideal outcome, of course.


The opinions expressed here are the author's own and do not reflect those of the NYSSCPA, its management, or its staff.

Richard H. Kravitz, MBA, CPA. Editor-in-Chief.

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