Accounting
The accounting profession’s role in ESG reporting
As the concerns over climate change, depletion of natural resources (i.e., deforestation and water scarcity), and health and safety issues are reaching new levels, there has been growing sentiment among business leaders, investors, consumers and regulators that innovative business strategies and risk management practices are necessary to sustain profitability. Here are a few eye-opening statistics:
- A
global study published in February by the Association of International Certified Professional Accountants and the International Federation of Accountants found that 98% (99% in the U.S.) of companies publicly disclosed some level of environmental, social and governance information. And 69% (88% in the U.S.) have obtained some level of assurance. - The CDP Global Supply Chain Report in 2021, a study of over 200 supply chain members with $5.5 trillion in procurement spending, shows that over 90% of companies are engaging suppliers on environmental performance, representing over 41% in year-over-year disclosures.
- A recent study by another large accounting firm indicates 74% of M&A participants have ESG considerations as part of their agenda; a similar survey by another firm stated that 57% of inventors view sustainability information as “critical” in evaluating investments.
These trends demonstrate the momentum in measuring and reporting information around sustainability, specifically how sustainability strategies translate into longer-term financial performance and cash flows, new products and technologies, and ethical business practices.
What standards are companies using to report its sustainability or ESG information? ESG reporting has had a long history of inconsistency. The above-referenced AICPA and IFAC survey shows that 87% (93% in U,S.) of companies reported under multiple ESG reporting frameworks. However, the past few years have seen a flurry of consolidation, standardization, and alignment in this space that has paved the way for regulations to come into play. Again, this activity is driven by the need for consistent, accurate and relevant data that can be used by stakeholders in making decisions.
Importantly, ESG reporting is investor-driven. The International Sustainability Standards Board, established in November of 2021, has consolidated international frameworks and standards for ESG reporting and passed its first two rules in June 2023. The European Union formally adopted the European Sustainability Reporting Standards that inform the Corporate Sustainability Reporting Directive rule in July 2023 that allows for interoperability with the ISSB’s new standards.
In the U.S., the Securities and Exchange Commission passed its climate disclosure rule in March 2024, requiring publicly traded companies to report on Scope 1 and 2 emissions, when material. California passed two sets of regulations for greenhouse gas emissions reporting and ESG reporting in October 2023. Illinois, New York, Colorado, Vermont and Maine all have regulations pending in various stages of approval related to ESG reporting and compliance.
Many technology solutions have entered the market to make data aggregation and ESG reporting achievable.
In the coming months and years there are sure to be challenges to ESG reporting regulations in the United States. It is likely that lawsuits will argue claims related to a state’s extraterritorial authority (e.g., requiring Scope 3 emissions from a company’s value stream outside of a state’s jurisdiction). The SEC rule has already been met with significant legal challenges, and the SEC has voluntarily issued a stay pending judicial review. And many are awaiting for the results of the upcoming elections to act. But what is clear in this space is that standardization and consolidation of frameworks have increased significantly, and as a result of this alignment, regulations are being promulgated across the globe and are here to stay. Furthermore, these regulations impact U.S. companies.
The EU’s ESRS are already effective and apply to multinational companies with significant EU operations. These requirements are expected to affect over 3,000 companies in the U.S. The related assurance requirements begin to rollout in 2025.
Regardless of what happens with the SEC standards, there remains a strong desire from many stakeholders in the United States to formalize regulations for GHG emissions and ESG reporting modeled after the ISSB framework and standards. Many expect the state regulations will fill the gap left by less stringent national regulations, but perhaps at a cost to more complicated, fractured reporting requirements.
The importance of assurance
To ensure stakeholder’s confidence in the ESG data being disclosed, many companies have started engaging third-party firms to provide assurance on the ESG information. As referenced above, 88% of U.S. companies reporting ESG information obtained some level of third-party assurance. The trend toward greater assurance is evident; however, the high percentage does not tell the full story. For one, 82% of assurance was provided in the form of “limited assurance”. Limited assurance, or review engagements, are much less rigorous than audits. As the use of ESG information continues to increase we should start to see a move from limited to “reasonable” assurance.
To date most assurance has been voluntary; however, that trend will likely start shifting to mandatory in the coming years as new sustainability reporting standards require assurance. We are already seeing this in Europe with the ESRS. The recent SEC and California regulations also have assurance requirements.
A further look at the firms providing assurance is noteworthy. Most of the assurance service providers in the U.S. are not CPA firms, but rather boutique, engineering and consulting firms. In fact, only 23% of the firms providing assurance in the U.S. were traditional CPA firms. This presents a significant opportunity for the accounting profession.
Similar to sustainability reporting standards, a global baseline for assurance has not existed. That is about to change with the expected issuance of International Standard on Sustainability Assurance 5000 expected to be issued by the International Auditing and Assurance Standards Board by the end of the year.
All of these factors point to the need for the accounting profession to prepare for the increasing demand for assurance services.
The role of the accountant
What does this all mean for the accounting profession? The evolving landscape of ESG reporting, coupled with the increasing global demand for high-quality, accurate sustainability information, means a significant opportunity for CPAs and accountants to add value to business. CPA firms are perfectly positioned to provide advisory and assurance services, given their infrastructure around audit quality, independence requirements, and professional development.
The technical training accountants receive in enterprise risk management, internal controls and financial reporting are essential building blocks to the skills needed to implement a successful sustainability reporting program. Just as important are the critical thinking and communication skills needed to influence change across an organization. One of the keys to implementing a successful ESG reporting infrastructure and providing quality assurance services is applying the concept of materiality to business risks and opportunities; this has also been one of greatest challenges to ESG reporting. This is another area CPAs are familiar with.
There is no question that CPA firms will need to invest in cross-functional capacity building and training around the evolving ESG reporting and assurance standards to meet the demands of stakeholders. Firms will also need to establish relationships with subject matter specialists that may not reside within the firm. Many tools have developed in recent years to assist firms in this regard.
As ESG reporting and assurance requirements expand, companies, investors and other stakeholders will turn to the trusted accounting profession. Those CPA firms that focus now will be best prepared to meet the demand expected in the next few years.
The House Ways and Means Committee held a hearing Tuesday to mark up the so-called “one, big beautiful bill” extending the expiring provisions of the Tax Cuts and Jobs Act while adding other tax breaks for tip income, overtime pay and Social Security income and eliminating tax credits from the Inflation Reduction Act for renewable energy as well as the Direct File and Free File programs.
“Today, this Committee will move forward on President Trump’s promise of delivering historic tax relief to working families, farmers and small businesses,” said committee chair Jason Smith, R-Missouri, in his opening statement. “The One Big Beautiful Bill is the key to making America great again. This moment has been years in the making. While Democrats were defending IRS audits on the middle class and tax carveouts for the wealthy, Republicans on this Committee got on the road, to hear from real Americans about how the 2017 tax cuts benefited them. This bill wasn’t drafted by special interests or K Street lobbyists. It was drafted by the American people in communities across the country.”
Democrats blasted the bill. “In 2017, Republicans passed a tax law that was supposed to pay for itself, raise wages, and help working families,” said ranking member Richard Neal, D-Massachusetts. “None of that happened. Instead, it exploded the deficit, worsened inequality, and left everyday Americans behind. Now they want to double down on the same failed playbook. One that rigs the system for billionaires and big corporations while everyone else pays the price.”
Among the provisions, the bill would make the expiring rate and bracket changes of the TCJA permanent and increase the inflation adjustment for all brackets excluding the 37% threshold, according to a
Other changes and limitations to itemized deductions would be made permanent, including the limitation on personal casualty losses and wagering losses and termination of miscellaneous itemized deductions, Pease limitation on itemized deductions, and certain moving expenses.
The bill is likely to go through some changes when it goes to the Senate. “Politically, we’ve been talking about the process for the last couple months,” said Mark Baran, managing director at CBIZ’s national tax office. “Congress is finally able to pass a concurrent resolution to unlock the budget reconciliation process.”
“The House and the Senate have completely different instructions on what they’re going to cut and how they’re going to score,” he added. “Some of that’s very controversial, and that needs to be worked out. But now we’re getting into the actual crafting of provisions and legislation.”
According to a
The bill would also allow businesses to include amortization and depreciation when figuring the business interest limitation through Dec. 31, 2029, while making permanent the excess business loss limitation.
In addition, the bill would retroactively terminate the Employee Retention Tax Credit for taxpayers who filed refund claims after Jan. 31, 2024.
In keeping with Trump campaign promises, the bill would eliminate taxes on tips for employees in certain defined industries where tipping has been a traditional form of compensation. There would be a new $4,000 deduction for seniors that phases out starting at $75,000 of income. The bill would also eliminate taxes on overtime pay.
The bill would give individuals an above-the-line deduction for interest on loans used to purchase American-made cars, but that would be capped at $10,000 with income phaseouts starting at $100,000 (single) and $200,000 (married filing jointly).
The bill would also increase taxes on certain private college investment income up to a maximum of 21% on universities with a student-adjusted endowment above $2 million.
It would also roll back some of the renewable energy provisions from the Inflation Reduction, including a phaseout and restrictions on clean energy facilities starting in 2029, while also limiting or eliminating clean housing energy and vehicle credits. The bill would sunset major IRA clean electricity tax credits, including the clean electricity production tax credit (45Y), clean electricity investment tax credit (48E), and nuclear electricity production tax credit (45U) begin phasing out after 2028 and finish phasing out by the end of 2031; repeal hydrogen production credit (45V) for facilities beginning construction after 2025, according to the Tax Foundation. It would also phase out advanced manufacturing production credit (45X) for wind energy components after 2027, for all other eligible components after 2031. Across several IRA clean energy credits, the bill would repeal transferability after the end of 2027 and further limit credits based on involvement of foreign entities of concern. On the other hand, it would expand the clean fuel production credit (45K), and tighten rules on the 126(m) limitation for executive compensation.
The bill would terminate the current Direct File program at the Internal Revenue Service and establish a public-private partnership between the IRS and private sector tax preparation services to offer free tax filing, replacing both the existing Direct File and Free File programs.
The Federal Accounting Standards Advisory Board is asking for input on emerging accounting issues and questions related to reporting entity reorganizations and abolishments as the federal government endures wide-ranging layoffs and reductions in force, including the elimination of entire agencies by the Elon Musk-led Department of Government Efficiency.
“Federal agencies and their functions, from time to time, have been reorganized and abolished,” said FASAB in its
Reorganization refers to a transfer, consolidation, coordination, authorization or abolition of one (or more) agency or agencies or a part of their functions. Abolition is a type of reorganization and refers to the whole or part of an agency that does not have, upon the effective date of the reorganization, any functions.
The Trump administration has recently moved to all but eliminate parts of the federal government such as the U.S. Agency for International Development and the Consumer Financial Protection Bureau, and earlier this month, Republicans on the House Financial Services Committee
FASAB issues federal financial accounting standards and provides timely guidance. Practitioner responses to the request for information will support its efforts to identify, research and respond to emerging accounting and reporting issues related to reorganization and abolishment activities, such as transfers of assets and liabilities among federal reporting entities. The input will be used to help inform any potential staff recommendations and alternatives for FASAB to consider regarding short- and long-term actions and updates to federal accounting standards and guidance in this area.
The questions include:
- Have any recent or ongoing reorganization activities or events affected the scope of functions, assets, liabilities, net position, revenues, and expenses assigned to your reporting entity (or, for auditors, your auditees)? If so, please describe.
- What accounting issues have you (or your auditees) encountered (or do you anticipate) in connection with recent or potential reorganization activities and events?
- Please describe the sources of standards and guidance that you (or your auditees) are applying to recent, ongoing, or pending reorganization activities and events.
- Have you experienced any difficulties or identified gaps in the accounting and disclosure standards for reorganization activities and events? What potential improvements would you recommend, if any?
FASAB is asking for responses by July 15, 2025, but acknowledged that late or follow-up submissions may be necessary given the provisional nature of the request. Responses should be emailed to [email protected] with “RERA RFI response” on the subject line.
Social Security benefits at risk for defaulted student loan borrowers
How to save for college in a volatile market
House Republican tax plan debate kicks off. What to watch
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Economics1 week agoChina risks deeper deflation by diverting exports to domestic market
-
Personal Finance5 days agoHow consumers prepare for an economic hit
-
Personal Finance7 days agoI bonds investments and Trump’s tariff policy: What to know
-
Personal Finance5 days agoReal estate and gold vs. stocks: Best long-term investment
-
Economics6 days agoThe president has deleted a key tenet of American civil-rights law
-
Economics6 days agoAndrew Bailey on why UK-U.S. trade deal won’t end uncertainty
-
Economics6 days ago
Trump knocks down a controversial pillar of civil-rights law
-
Finance4 days agoAmerica failing its young investors, warns financial guru Ric Edelman