Nature of the Debate

Gallagher's statement was not a stand-alone attack on SASB, but rather represented a small portion of his speech about the regulation of corporate governance and the role of federal regulation, including the Sarbanes-Oxley Act and the Dodd-Frank Act. In Gallagher's concluding remarks, when he discussed good regulation, investor protection, and the reform of corporate disclosure requirements, he stated, “We must also take exception to efforts by third parties that attempt to prescribe what should be in corporate filings. It is the Commission's responsibility to set the parameters of required disclosure.” He referred to SASB as “a good example of an outside party attempting to prescribe disclosure standards,” and he noted that it has “no role in establishment of mandated disclosure requirements” because it has not been delegated any authority, unlike FASB.

In response, SASB CEO Jean Rogers blogged on April 4 that SASB does not mandate disclosures; rather, it develops standards to help companies comply with the SEC's Regulation S-K Management's Discussion and Analysis (MD&A) section by reporting on material sustainability information that investors need for decision making. I found one of SASB's points to be very interesting: SASB is not determining materiality but is trying to encourage companies to avoid disclosing immaterial sustainability information—because, according to SASB research, 75% of what is currently reported is immaterial—by identifying a minimum set of sustainability issues most likely to be material within industries and by proposing quantitative metrics.

Impact on the Profession

These events are significant to accountants and auditors. Is sustainability reporting considered material investor information that must be disclosed under existing requirements, or is it optional information? If it is required, who determines how that information should be formatted or where it should be disclosed? What is the auditor's role in reviewing it or advising companies to report on it?

Historically, the AICPA has recognized the need for clear and understandable financial and nonfinancial information about how management runs a business. The AICPA has been actively involved in efforts to improve business reporting, and it believes that its members should take the lead in determining standards for reporting on sustainability. Recently, the Big Four have been very actively involved in offering sustainability reporting education and providing businesses with guidance and consultation.

In my view, sustainability initiatives can be a key component of companies’ operations, and sustainability reporting metrics could be key performance indicators, particularly in certain industries. The existing MD&A requirement to enable readers of financial information to see the company “through the eyes of management” would encompass the discussion of sustainability matters, particularly as they relate to material initiatives, expenditures, or activities impacting results of operations and liquidity.

But I also remember that, when I first heard of SASB and its work, I was surprised that it was not the same as FASB (although their names are similar); rather, it was a board composed of volunteers and industry working groups not sanctioned by the SEC or FASB developing and promoting standards that companies should use. Those siding with the SEC might ask what would stop anyone with a passion for a particular aspect of investor information from creating an organization and a website and promulgating recommended disclosures in the name of investor protection. To its credit, SASB (and related groups) has raised awareness, gotten public attention, issued guidance, and gotten the attention of the Big Four. The SEC, to date, has not issued any rules or best practices on sustainability reporting.

The Next Step for Sustainability Reporting

Authors Lin, Romero, Jeffers, and DeGaetano shared their reaction to Gallagher's speech with me (“Is It Time for Companies to Capitalize on Sustainability: Considering the Oppor tunities and Challenges” and “An Over view of Sustainability Reporting Practices: Results of Related Research and Recommendations for the Future”, The CPA Journal, March 2014). They indicated that because sustainability initiatives are an important factor in corporate decision making and users of financial statements are demanding more transparent reporting, there should be more standardized reporting and consistent information presented, with some regulatory oversight. The usefulness of these disclosures may be diminished, as there are no authoritative or uniform requirements for reporting these initiatives today. They suggested the possibility of collaboration between the SEC and the private sector as a possible solution, which I agree with.

The SEC's comments are an important development, and members of the profession should focus more on sustainability in the months ahead. I also encourage you to share your views on the SEC's and SASB's comments about sustainability reporting with The CPA Journal.