Archives For FASB

Katie Schmitz Eulitt, SASB

By Katie Schmitz Eulitt, Director of Stakeholder Engagement, Sustainability Accounting Standards Board (SASB)

A recent ACCA report discussed how differing definitions of materiality affect the boundaries of materiality decisions made by companies. In light of this report, we wanted to offer SASB’s perspective on natural capital and materiality in the context of mandatory disclosure to the Securities & Exchange Commission (SEC).

SASB develops sustainability accounting standards for publicly-listed U.S. companies. The standards are designed for the disclosure of material sustainability issues in SEC filings. By the end of 2014, SASB will have issued standards for 45 industries. By early 2016, SASB standards for more than 80 industries in ten sectors will be available.

While FASB and US GAAP exist for the purpose of disclosing corporate performance through metrics focused on financial capital, SASB’s concern is with accounting for material non-financial issues, including environmental and social capitals that are not accurately priced. SASB is defining parameters that express a true and fair representation of performance on non-financial issues, for investors and analysts to use in evaluating companies. This picture includes attention to the management of critical capitals, vulnerability to depletion, and risks associated with mismanagement. SASB’s approach to sustainability accounting consists of determining standard disclosure and metrics to account for companies’ performance on material sustainability issues.

So, how will SASB standards change corporate performance? By helping companies to account for all forms of capital. Accounting for sustainability impacts means measuring, verifying, and reporting—in other words, being accountable for—the environmental, social, and governance (ESG) performance of an organization. Sustainability accounting standards are intended to complement financial accounting standards. The goal is for investors to be able to evaluate financial fundamentals and sustainability fundamentals side by side. With this information, investors can assess ESG risks and opportunities in an investment portfolio, and companies can improve performance on the ESG issues most relevant to their business success.

The impacts of business on society and the environment, as well as the impact of sustainability issues on business, are often headline news. The perfect storm of global population density, food and water security issues, and extreme weather events is not predicted to subside. Thus, companies need to better understand how these factors inhibit and/or enhance their ability to create value, for shareholders and society alike. SASB’s industry-specific guidelines help companies identify the ESG issues that are likely to be material to their business, and provide investors with the ability to compare company performance on these issues. SASB is using a rigorous method to develop standards that are tailored to each industry. By identifying the minimum set of material issues for every industry, SASB standards surface the information that truly matters. SASB standards are designed to be cost-effective for companies and decision-useful for investors.

Our standards abide by the U.S. Supreme Court’s definition of material information, defined as presenting “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.” Regulation S-K requires corporations to disclose material information to investors in the Form 10-K. While FASB provides standards for the disclosure of material financial information, there are no standards for the disclosure of material non-financial information. SASB is emerging to fill this need.

We encourage everyone interested in materiality, natural capital, and the U.S. capital markets to participate in SASB’s standards development process. Sign up for industry working groups, participate in public comment periods, download and use our standards.

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By Sue Almond, technical director, ACCA

reporting

 

I was fortunate to chair a roundtable on the future of audit while MEP Karim, rapporteur for the JURI committee on the EC audit proposals, was in New York recently on a fact-finding visit to understand more about the US and the global audit market, to consider the broader impact of the EU audit proposals. The roundtable attracted a wide range of attendees, and it was interesting to hear the perspectives from the US. Not surprisingly, much of the debate focussed on the critical EU proposals such as mandatory auditor rotation, tendering and non-audit services.

There were some general recurring themes that arose at the roundtable:

  • Although a single country, the US state system is not so different to EU member states – for example auditors are required to be registered with the state.
  • The distinction between public company audit (regulated by PCAOB and SEC) and private company audit (AICPA and state) is quite significant.
  • The rules on audit committees are set by the SEC. These tend to relate to the legal requirements, including independence of Audit Committee (AC) members, rather than the functioning of the AC, and there was strong support for an enhanced, and more transparent, role for the AC. There was general support for the role of the AC in evaluating non-audit service provision.
  • There was very strong disagreement with mandatory audit rotation across almost all sectors (in line with the feedback to the recent PCAOB consultation on the topic), and in fact the day before the roundtable a motion was tabled in Congress to prohibit any proposed rules on this. The practical impact on global businesses of potentially different mandatory rotation requirements in different jurisdictions was noted. However, it appears PCAOB may still be interested in pursuing rotation.
  • FASB will shortly publish going concern proposals. This is important because the current position is that management in the US have no requirement/responsibility to make a going concern assessment – it is purely the role of the auditor. This is causing significant problems for the IAASB in its auditor reporting project, where there is pressure for the auditor not to be generating ‘new’ information.
  • There was support for global standards, e.g. ISAs (International Standards on Auditing) and IESBA Code of Ethics.

MEP Karim published his final proposed amendments for the EU Audit proposals for vote just after the roundtable. They are very much in line with the position ACCA took on the original proposals more than 18 months ago:

  • We support adoption of global standards (e.g. ISAs, including on auditor reporting, IESBA Code, independence/non-audit services, ISQC1)
  • We support strengthening the role of the audit committee and increased transparency
  • We do not support mandatory rotation of auditors as we do not believe that there is evidence that supports an improvement in audit quality as a result
  • We do not support restricting the role of professional bodies, particularly in relation to the monitoring of auditors of unlisted entities.

Following the approval on MEP Karim’s report, the focus now moves to the Council. Let’s hope that they will recognise the good work that has been done in the Parliament as they now work on their revisions to the audit proposals …