business sustainability and accountability reporting
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BUSINESS SUSTAINABILITY AND ACCOUNTABILITY
REPORTINGZabihollah Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM, CSOXP, CGOVP,
CGRCPAnd
James M. Lukawitz, PhD, CPAThe University of Memphis
2011 Global Finance Conference in Bangkok, Thailand, April 3-5, 2011
Introduction• In today’s business environment, global businesses are under close scrutiny and profound pressure
from lawmakers, regulators, the investment community, and their diverse stakeholders to focus on sustainability and accept accountability and responsibility for their multiple bottom lines (MBL) of economic, governance, social, ethical, and environmental (EGSEE) performance.
• Sustainability is the process of integrating economic, governance, social ethics, and environmental (EGSEE) dimensions into all the decision-making and accountability processes and measuring and reporting log-term and enduring performance in all EGSE E areas.
• This definition suggests that all sustainability performance factors (EGSEE) add value and thus internalizes some environmental, ethics, governance and social factors that have not traditionally been reported in the conventional corporate reporting.
• Business sustainability is a process of enabling organizations to design and implement strategies that contribute to enduring performance in all EGSEE areas.
• Business sustainability not only ensures long-term profitability and competition advantage but also help in maintaining the well-being of the society, the planet and people.
• Business sustainability and corporate accountability is all about adding value in all areas of economic, ethics, governance, social and environmental (EGSEE) matters and events.
• Many public companies are now voluntarily manage, measure, recognize and disclose their commitment and events and transactions relevant to EGSEE.
Proposes Of presentation• Define Business Sustainability.• Discuss Dimensions of Business Sustainability (EGSEE)
and Demand for EGSEE performance• Present Accounting and Assurance of Sustainability
Reporting.• Present Results of a Survey Conducted To Determine
the Value of Sustainability Reporting.• Much of the Presentation is from Z. Rezaee “Business
Sustainability and Accountability Reporting” forthcoming Book, John Wiley & Sons, 2011.
Demand for Business Sustainability
• The 2007-2008 financial crisis, its resulted economic downturn and regulatory responses along with global competition encourage organizations of all types and sizes to pay a keen attention to their sustainability programs composes of EGSEE activities.
• In the post-financial crisis and new regulatory framework era, corporations are under more pressure from variety of stakeholders to provide accurate, reliable and relevant financial and non-financial information pertaining to their economic performance, strategic objectives, governance, risk and social responsibility.
• On May 4, 2010, the International Federation of Accountants (IFAC) and the Prince’s Accounting for Sustainability (A4S) Project agreed to collaborate in promoting sustainability organizations .
• Particularly the IFAC and A4S’ sustainability project addresses:• “Raising awareness and facilitating sharing and collaboration across the global accountancy
community, for example, through the development of a community website for professional accountancy organizations, business leaders, academics, and other experts to exchange ideas and share good sustainability practice;
• Establishing an international integrated reporting committee to develop a new reporting model that will better reflect the interconnected impact of financial, environmental, social, and governance factors on the long-term performance and condition of an organization; and
• Incorporating accounting for sustainability within professional training and education.”
What sustainability means in practice?• Minimize or eliminate negative impact on nature
and natural resources • Apply natural processes and technologies, which
regenerate nature• Respect human and social values and interests
(employees, consumers, local communities)• Listen to signals from society and environmen.
The balance of ecological and social footprint
The business model for Sustainabe Development
Aligning business interests with the needs of society
Sustainable development for a multinational company
Solvent management of business
Governance, financial, risk management...
Long Term
“Intelligent communication”
Transparency
Innovation
“Better products and services for a better world”
Public Commitments
Social, environmental, economic, ..
Accountability and Sustainable Development
Benefits of Sustainabe Development strategy
• Helps Opportunity to detect new products and services
“Better products for a better world”• Efficient way to transmit and strengthen business
culture• Useful tool to manage risk properly …
… in a changing world• Key issue to make an impact on our positive
reputation• Way to share useful information with stakeholders…
Advantages of applying corporate sustainability
Helps preparing for environmental and social risks as well as for
seizing business opportunities
Implementing substantial cost savings
Inspires creativity for developing new products and services
Reaching new markets and customers
Strengthens corporate image and reputation internally and externally
Motivation for the employees
Differentiates from competitors
Positive social and/or environmental impact
Major obstacles No real understanding of the importance of SD by
managers Confusion around CSR and sustainable
development Lack of real pressure from demand side (consumer
awareness) No obvious links between corporate sustainability
and financial performance Lack of generally accepted benchmarks and
indicators for measuring coprorate sustainability
Main areas Energy and climate change Poverty and inclusive business Business role in tomorrow’s society Ecosystem services Technology and innovation Accountability, transparency, governance Human rights Corporate social responsibility Ethical behavior
Entity Performance
Performance
Goals
Governance
Roles and Responsibilities
of CG Participants
Economic
Value creation and
Enhancement for all
Stakeholders
Reports
Assurance
CG Report
Assurance Report Audit Report
Financial Reports
Ethical
Ethical and Moral Values
Codes of Conduct
Assurance Report
Social
Social Issues regarding
Products and Services
Social Responsibility
Report
Assurance Report
Environmental
Environmental Audit Report
Environmental Management
and Report
Performance
Accounting for business sustainability
• Accounting for business sustainability is the process of identifying, classifying, measuring, recognizing and reporting performance in all areas of EGSEE.
• Accounting for sustainability is often referred to as “green accounting” or “green reporting”. Nonetheless, it covers all areas of economic viability, ethical culture, corporate governance, social responsibility and environmental awareness.
Assurance Standards in Sustainability Reporting
• Assurance standards on different dimensions of sustainability performance very in terms of vigorousness and general acceptability.
• auditing standards either PCAOB Auditing standards in the United States of International Auditing and Assurance Standards (IAAS) governing reporting and assurance on economics activities.
• Assurance standards on other dimensions of sustainability including governance, ethics, social and environmental standards are yet to be fully-developed and globally accepted.
• The International Standard on Assurance Engagements (ISAE) 3000 issued by the IAAS Board in 2004 provides guidance for assurance on non-financial dimension of sustainability.
• AA1000AS issued in 2008 by the AccountAbility (AA) a global nonprofit organization that established management, reporting and assurance guidance for nonfinancial dimensions of sustainability performance.
• American Certified Public Accountants (AICPA) AT 101. • The Canadian Institute of Charted Accountants (CICA) Handbook Section 5025.
Method and Procedures• Three methods are used in gathering data pertaining to sustainability reporting. • First, we review the related literature, including published papers and
publications of professional organizations, in gathering information in developing different sections of the questionnaire.
• Second, we conduct a survey of accounting practitioners participated at the professional meetings of local chapters of Certified Public Accountants (CPA), Institute of Internal Auditors (IIA) and Institute of Management Accountants (IMA) in both Midsouth and Southwest regions.
• We prepared, pilot-tested, revised, and then submitted the questionnaire to the participants.
• The instrument was pilot-tested using an MBA class in the Midsouth region of the United States.
• Finally, we examined the financial statements for the Fortune 100 US Companies to determine their sustainability disclosures and their use of the GRI procedures.
RESULTS• Respondents were asked to indicate the importance of
several aspects of corporate reporting.• Attributes of corporate reporting listed in Table 1 can be
classified into three- tier aspects.• Tier one consists of four attributes considered the most
important with the mean responses of greater than 4.25. These attributes are: (1) auditor report on financial statements; (2) auditor report on internal controls; (3) management certification of internal controls; (4) management certification on financial statements.
QuestionsMean
ResponseStandardDeviation
1 Auditor report on financial statements n=101 4.30 0.87
2 Auditor report on internal controls n=102 4.28 0.91
3 Management certification of internal controls n=101 4.27 0.9
4 Management certification on financial statements n=102 4.25 0.87
5 Management disclosures and analysis (MD&A) n=102 3.98 0.86
6 Information pertaining to executives performance and compensation n=102 3.96 0.97
7 Financial key performance indicators (KPIs) n=102 3.95 0.99
8 Corporate governance information (board effectiveness) n=101 3.91 0.90
9 Ethical responsibility performance information n=102 3.86 1.02
10 Financial information on economic events n=101 3.84 1.05
11 Strategy information (goals, objectives, plans) n=102 3.73 0.94
12 Market information (growth, market share, stock prices) n=103 3.70 0.99
13 Social responsibility information (customers, people, innovation) n-102 3.59 1.01
14 Nonfinancial key performance indicators (NKPIs) n=101 3.52 1.01
15 Environment responsibility performance information n=99 3.36 1.06
Table 1 Sustainability Reporting
ResultsThe second tier consists of attributes 5-8 in Table 1, which
are considered somehow important with the mean responses of greater than 3.9. These attributes are:
(1) management disclosures and analysis (MD&A); (2) information pertaining to executive’s performance and
compensation; (3) financial key performance indicators (KPIs); (4) corporate governance information (board
effectiveness).
RESULTSThe final tier consists of attributes 9-15 in Table 1 with the mean
responses of between 3.85 and 3.52. These attributes of corporate reporting which are considered least
important by respondents are: (1) ethical responsibility performance information; (2) financial information on economic events; (3) strategy information (goals, objectives, plans); (4) market information (growth, market share, stock prices); (5) social responsibility information (customers, people, innovation); (6) nonfinancial key performance indicators (NKPIs); (7) Environment responsibility performance information.
RESULTS• An examination of the annual reports of the Fortune 100
Companies shows that: • fifty-nine of them have some sustainability disclosures. • When broken into quintile, it is noteworthy that sixteen
of the largest twenty firms report on sustainability, while only six of those in the lowest quintile have any sustainability reporting.
• GRI is the overwhelming choice among disclosing firms with thirty-eight (including thirteen from the first quintile) firms using this method.
Deciles
Sustainability
Reports
# UsingGRI
1 Companies 1 to 10 10 92 Companies 11 to 20 6 43 Companies 21 to 30 4 34 Companies 31 to 40 6 45 Companies 41 to 50 8 46 Companies 51 to 60 6 47 Companies 61 to 70 6 48 Companies 71 to 80 7 29 Companies 81 to 90 4 410 Companies 91 to 100 2 1
Totals 59 38
Table2 Fortune 100 Sustainability Reporting
CONCLUSION• Investors do appear to value these sustainability disclosures,
however; they value them lower than the traditional financial disclosure information.
• This would support the theory that sustainability concerns and disclosures should only be of concern to a business only after financial viability has been well established.
• Furthermore, based on the examination of the annual reports, the GRI index does seem to be establishing itself as the standard for these disclosures.
• Future research needs to investigate the cost/benefit of these disclosures and whether these disclosures should remain voluntary or should become required disclosures.
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