By Jim DeLuccia, PICPA manager of research, publications, and insights

PICPA Insights: ESG Standards and Reporting – a white paper that analyzes the familiarity that Pennsylvania CPAs have with key environmental, social, and governance (ESG) topics, exposures, and opportunities – revealed major findings relative to CPA practitioners. The following is an excerpt from this paper published earlier this year.

This Insights study and feedback from industry leaders reveal that the accounting profession has an opportunity to have a meaningful impact on ESG reporting. “The changes wrought by SEC rulemaking could be on the scale of those the profession had to manage with Sarbanes-Oxley (SOX),” explains Allison M. Henry, CPA, CGMA, vice president of professional and technical standards at the PICPA. “A SOX-sized response from the profession will require investment in learning, resourcing, knowledge building, etc.”

Just like financial reporting, ESG reporting relies on solid internal controls, careful measurement of results and key metrics, data analysis and distribution for internal and external decision-making, risk assessment and mitigation, and objective assurance. No other profession is as well-suited to provide these services, both as internal and external experts, than CPAs.

Our study indicates favorable perceptions of ESG, yet there appears to be a low desire to build reporting measures in an accounting practice or company. The majority of respondents [to a survey conducted in spring 2022] – whether they worked for public accounting or in industry – believe ESG reporting would be rife with fraud without proper controls, and uniform standards would go a long way in preventing fraud.

Further, while survey respondents share generally favorable views of ESG, we know that certain aspects of ESG – even the concept of nonfinancial reporting or corporate motivation other than profit – can be politically or philosophically divisive. Those who believe that ESG is important and worthwhile because of the good it can do for society or the environment should support measurement, reporting, and assurance because it has the potential to prove positive impacts. Those who believe ESG factors are irrelevant or dubious should support measurement, reporting, and assurance because it has the potential to prove neutral or negative impacts. In recent speeches, Barry Melancon, CEO of the Association of International Certified Professional Accountants, has discussed the value that ESG reporting offers those on both sides of the debate, and our experts agree.

While survey respondents reported moderate familiarity with ESG concepts and generally favorable perceptions of ESG, they also reported low familiarity with standards. The mismatch could make it hard for CPAs to capitalize on growing opportunity in the space.

The Competition

Other professions and bodies, including certified financial analysts, management consultants, internal auditors, attorneys, and others, are moving quickly into this space. One might draw a correlation between the advent of the income tax and accountants’ ability to own that space and propel the future of firms with a similar opportunity to own the ESG space and protect the future of assurance. As business opportunities related to tax compliance and the profitability of attestation erode, ESG is presenting itself.

Our experts acknowledge the tremendous revenue potential as assurance services trickle down from the large corporations engaging Big 4 firms to smaller organizations looking for help from their current advisory or audit firms. If those clients don’t find the services they’re searching for with their current firms, they will look elsewhere – putting core service lines at risk, as well.

Auditors of large companies cannot choose not to consider and account for ESG factors, including as part of the risk assessment. Audit firms will need to keep up or risk getting left behind.

Adding Value

While a large portion of ESG reporting may be viewed as outside the expertise of many CPAs, translators are needed between non-CPA stakeholders and core audit teams.

Changing client demands, evolving skillsets, and the extremely challenging talent market are impacting firm value. Those that fetch the highest prices in the merger and acquisition market are those who have kept up with change, built new capacity and skills, and differentiated themselves from their peers. ESG expertise and established practices could be a strong asset for firms interested in acquisition.

“There are going to be an increasing number of opportunities in both the ESG advisory and assurance spaces for firms,” says Liz Vescio, CPA, CFE, an ESG advisor at Crown Castle. “Many companies are looking to complement their internal expertise with partners who provide thought leadership on some pretty complex topics and calculations. From accounting for various renewable energy sources, to performing independent calculations of emissions, the opportunities for accounting firms to add value is tremendous.”

Some accounting firms have indicated that they lack the resources to take on new work, so many companies are asking internal audit departments to assume additional responsibilities. Public accounting firms will need to evaluate their current workload and may need to recalibrate their priorities to accommodate ESG reporting or risk getting left behind. This may entail firms retooling their business models to leverage technology, outsourcing, and the expertise of non-CPAs.

Check out ESG Reporting and Assurance for Small and Midsize Firms Zoom on Sept. 30 to learn more about the opportunities ESG present to CPAs. PICPA members have full access to PICPA Insights: ESG Standards and Reporting. Learn more about the findings from our ESG research – and other scheduled Insights projects – at www.picpa.org/esg.  

James V. DeLuccia is manager of research, publications, and insights at the PICPA. He can be reached at jdeluccia@picpa.org.

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