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Barry Melancon: New Sustainability Board Will Produce Truly International ESG Standards

By:
Chris Gaetano
Published Date:
Jan 11, 2022
Barry Melancon at ACA

Barry M. Melancon, the CEO of the AICPA, presented his annual Professional Issues Update as a webcast for the Accountants Club of America on Jan. 11, saying that while accounting professionals in the United States may be used to the split between international and U.S. accounting standards, that won't be the case when it comes to the reporting standards that are set to be developed by the new International Sustainability Standards Board (ISSB), as these  will be truly international. 

The formation of the ISSB was announced late last year after the 26th U.N. Climate Change Conference of the Parties (COP 26) in Glasgow The new board, which will be housed within the International Financial Reporting Standards (IFRS) Foundation as a sister organization to the International Accounting Standards Board (IASB), will produce reporting standards on environmental, social and governance (ESG) factors. Merging into this new entity will be the Value Reporting Foundation (itself the result of a merger between the Sustainability Accounting Standards Board and the International Integrated Reporting Foundation, of which Melancon had been chair) and the Climate Disclosure Standards Board. 

Melancon noted that the current paradigm of U.S. Generally Accepted Accounting Principles (U.S. GAAP) here and IFRS abroad came from the fact that the former was already decades old by the time the latter finally came onto the scene. By that time, the U.S. accounting environment had matured significantly since the concept of standards first started gaining currency in the wake of the Great Depression. This, however, is not the case for ESG standards.  

"There isn't a companion U.S. footprint, so this will truly be a global set of standards for business reporting in these broad areas," he said. 

This will fit in neatly with the multilateral approach the new ISSB is taking. Melancon noted that while the IFRS Foundation is headquartered in London, the new ISSB will have a presence in the United States, the United Kingdom, Germany and Canada; the ISSB said there would be further talks to have a location in Beijing and Tokyo as well. 

He added that the U.S. Securities and Exchange Commission (SEC) is unlikely to outright endorse ISSB standards in the immediate future, but said that the agency may not need to in order for these standards to be used. He noted that standards from the Committee of Sponsoring Organizations of the Treadway Commission (COSO) aren't officially endorsed either, but a lack of U.S. alternatives has made them de facto accepted. Melancon predicted that investor demand will likely drive ISSB standards along a similar path. 

"So the SEC probably won't adopt a rule, but I also don't think you will see activity to derail any of this in the U.S.," he said. 

Part of why this will be the case, he said, is that the stakeholders in ESG reporting aren't as contained by national borders, meaning that they demand a truly international solution. Companies calculating this information know this, and so want global standards to apply. 

While there is much work to be done in this area, he said that the new board already has a chair, and will likely name vice chairs over the next few weeks. The first set of exposure drafts for new standards are projected to be released sometime in the third quarter this year. 

Human Capital

Beyond ESG reporting, Melancon also spoke about the human capital challenges facing the profession at a time of mass resignations. He noted that while firms have not been immune to this economy-wide phenomenon, growing difficulties with talent acquisition, as well as a diminishing CPA pipeline, have been of concern to the profession, even well before the pandemic. 

He said that, in the recent past, the general message given to college students about accounting careers was that these careers would offer a higher-than-average starting pay and a much-higher-than-average amount of job security. Changes in the industry over the past 10 years, however, have eroded that message's credibility. 

"The primary driver of this was not firms hiring less people, but firms hiring different people: data analytics and tech [people], into their practices to a much different degree than what they had previously done," he said. "What happens when demand [for accounting grads] goes down? Well, salaries are affected at the entry level, pretty dramatically because they get basically frozen a couple of years. Then markets move above that, so you find many, many graduates with general business degrees or management degrees or marketing degrees getting paid entry level salaries exceeding offers collectively from accounting firms for accounting graduates. This produced a dampening effect on people's interest in accounting."

Melancon said that this change in the hiring market was one reason why the CPA Evolution initiative, a joint effort between the AICPA and the National Association of State Boards of Accountancy (NASBA) to transform the CPA licensure model, was launched. Another was to account for more specialized technical areas such as data analytics.

Melancon dismissed notions that the 150-credit-hour education requirements implemented in 2009 are keeping students from majoring in accounting, saying that the data isn't there: Students, when polled on why they did not pursue accounting, named the amount of schooling required as only the number 7 issue. 

He added that the profession needs to understand that students have changed, too. Years ago, the most popular college major for freshmen was "undecided." Now, he said, more people go into college with a definitive career plan in mind. This means that convincing students of the value of the accounting profession needs to start in high school, when people have yet to decide their career path. To do this, he said, there needs to be more role models for young people, and firms need to support this by making these role models available for schools. 

IRS Issues

Melancon also spoke briefly about developments in Washington, particularly those concerning the IRS. He noted that the agency recently warned practitioners that this year would be particularly difficult; considering the poor quality of service practitioners have experienced prior to this, he said that this announcement was especially troubling. 

Melancon said that he understands, and is even sympathetic, to the challenges faced by the agency, especially through the pandemic. At the same time, he thinks that the IRS must recognize the many "self-inflicted wounds" it has imposed that has made life more difficult not only for its own workers but for everyone affected by the tax system overall, particularly CPAs. 

He pointed to two interrelated issues in particular: the massive backlog of communications, and the automated penalty notice system. The agency is already challenged by the still-huge amount of unanswered correspondence, including amended returns, but when the automated system continues to generate penalties that must be dealt with through further communications, it only serves to increase the backlog further.

"So taxpayer responses are in the backlog, and meanwhile more notices are going out and there's just this whipsawing that goes along in this process that is very, very counterproductive to creating a better service element," he said. 

The AICPA has been advocating for the agency to at least turn off the penalty system or, at the very least, to increase the amount of time to respond from two weeks to 90 days, but he said that the agency has been hesitant. He understood that, but said it was creating long-term issues with taxpayer compliance. 

"They will say that because [some people] are abusing the process, 'We don't want to give them a free pass,'" he said. "We get that, but the majority of penalty notices are from taxpayers who are well meaning. Our tax system is a voluntary one, and the lack of service puts into question people's willingness to engage with the system in an honest way."

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