Adrian Johnson
TLDR:
Key Points:
- Accountants and auditors can play a role in making businesses more sustainable.
- The integration of sustainability into financial reporting is crucial for business success.
In today’s business environment, the focus on profit often overshadows environmental and social interests. The accounting profession needs to challenge traditional financial reporting and incorporate sustainability into mainstream reporting to create a more sustainable world. Luis Perera-Aldama’s concept of a “fourth financial statement” or value-added statement (VAS) offers a unique perspective on integrating sustainability into reporting, ultimately reshaping the social contract between business and society.
Full Article:
Can accountants and auditors become agents for real social change and make businesses more sustainable? In today’s business environment, where the insatiable desire to grow profits overshadows environmental and social interests, it is easy to overlook how the actions of economic actors can shape corporate – and environmental – outcomes. In the accounting profession, practitioners exercise scepticism and critical thinking to get their jobs done on a daily basis. But without recognising the true power of reporting, not many have questioned the fundamentals of financial accounting nor challenged accounting assumptions with the same degree of scepticism and grit.
As it stands, accounting standards relate mostly to large, publicly listed corporations rather than different economic agents. This can probably be explained by the predominance of capitalist economic structures in the United Kingdom and the United States (the origins of the “Big Four” accounting firms). Only when we recognise that power and conflict exist in society can we go about finding ways to better reflect differing interests and concerns.
Accounting reports could well be the means to achieve social balance by influencing the distribution of income, wealth and power – if we dare challenge their current architecture. With growing interest in the United Nations’ Sustainable Development Goals, ESG (environment, social and governance) investing, and impact investing, more companies are developing sustainability reports due to stakeholder pressure or to fulfill corporate social responsibilities (CSR). In practice, this typically involves including additional content on sustainability on top of conventional financial reports. But this is not enough.
How can we make the change towards a more sustainable world if we leave the financial information used to communicate business performance unchanged? We need to rethink reporting architecture so that sustainability information can be better integrated into reports. In other words, the ways we measure and report success must change. Essentially, integrating sustainability information into mainstream reporting is at the intersection of social, environmental, and financial accounting. CSR needs to be integrated into business, and measured and reported in a way that is financially, socially, and environmentally sustainable.
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More than half a century after the notion of VAS was first raised, accountants are taking the stage. Developments such as the GRI Standards, the SASB (Sustainability Accounting Standards Board) Standards, the World Economic Forum guidelines by the Big Four, and climate-focused initiatives such as the Task Force on Climate-Related Financial Disclosures spotlight the role of the accounting profession in influencing sustainability outcomes. Yet, none have questioned conventional financial accounting nor attempted to mainstream a VAS. When sustainability is left in the periphery, it will, at best, be an afterthought.
We need to update mainstream financial accounting from its 19th-century roots and 20th-century shareholder-predominant views to realign shareholders, stakeholders, and society. To do so is to redefine success, progress, and corporate performance. The model resulting from this research aims to make sustainability an integral and central part of mainstream reporting. It is a positive step towards a paradigm change in how we view a company’s performance and the value it creates – not only for shareholders but also for society. Thus, it is a step towards reshaping the social contract between business and society. To effect real change in sustainability outcomes, change the frame and the rules.
