Fall 2023

Environmental, social, and governance (ESG) measures continue to gain momentum as businesses are being called upon to disclose their performance and strategies around ESG efforts. (See the feature in the summer 2023 Pennsylvania CPA Journal on ESG reporting.) Accounting is playing an increasingly important role as ESG initiatives can impact many aspects of a business, including financial reporting and taxes.

In 2021, the Financial Accounting Standards Board (FASB) published the following possible impacts of ESG on a company’s financial statements:

• ESG matters may directly affect amounts reported and disclosed in the financial statements. For example, the recognition and measurement of compensation expense.
• ESG matters may indirectly affect the financial statements. For example, an entity may suffer reputational damage from an environmental contamination that reduces sales.
• An entity may consider certain ESG matters as an input to an accounting analysis. For example, a material decline in demand during the reporting period may be a consideration when estimating future cash flows used in a long-lived asset or goodwill impairment analysis.
• Risks and opportunities related to ESG matters may have unfavorable, favorable, or neutral effects on financial statements.
• Other ESG matters may not have any material effect on the financial statements.

Additionally, the following tax impacts were noted:

• Tax credits for energy-efficient buildings, electric vehicle charging stations, carbon recapture, and investing in and producing solar and wind power.
• Tax credits for employer-provided childcare facilities or for investing in low-income neighborhoods and building affordable rental housing.¹

The consequences of failing to properly address ESG risks and rewards are considerable. Accountants who are responsible for ESG reporting and disclosures need to prioritize sustainability and commit to incorporating ethical standards throughout the process.² Organizations such as the International Ethics Standards Board for Accountants (IESBA) is taking the lead in promoting and aligning business ethics with ESG.

One of the biggest ethical challenges is determining how to present credible information.³ With a lack of standardization, businesses are speaking different languages when it comes to ESG reporting and sustainability disclosures. Competing frameworks and various terminology throughout the workflow can create an ethics trap if the accountant is not careful. 

In February and March 2023, AICPA’s Professional Ethics Executive Committee (PEEC) discussed new IESBA projects on sustainability and the use of experts. The sustainability project will provide independence standards for assurance practitioners as well as ethics provisions relevant to sustainability reporting and assurance.⁴ The use-of-experts project involves specific independence provisions regarding the use of experts by businesses, as well as in the context of audit and assurance engagements, particularly sustainability assurance.⁵ Once released, these standards will provide a tangible framework for use in ESG reporting. 

There are two different aspects of the IESBA’s Task Force on the Use of Experts efforts: on ethics and independence requirements for sustainability assurance providers, and ethics requirements for those preparing sustainability information.⁶ IESBA’s task force is working with other global standard-setters in the field of sustainability reporting and assurance, including the International Auditing and Assurance Standards Board (IAASB) and the International Sustainability Standards Board (ISSB).⁷

The IESBA gave updates at PEEC’s first and second quarter meetings regarding its projects. The IESBA plans to approve an exposure draft at its December 2023 meeting. Both the sustainability and use-of-experts projects have held numerous roundtables to solicit feedback from stakeholders to help guide the revisions being completed throughout 2023.

In relation to sustainability, the task force is looking at how the ethics code can be enhanced, not just from an independence perspective, but also from a general ethics perspective that includes integrity, objectivity, and confidentiality. The use-of-experts project is not limited to sustainability, but because it has a strong tie to sustainability it is on the same trajectory. This project looks through the integrity and objectivity lenses of what should be considered when using an expert.⁸

There were a few key takeaways from the IESBA meeting in March, as noted by PEEC. First, revisions to the code of ethics will be profession-agnostic. That is to say, the sustainability reporting ethics requirements will apply to professional accountants and those who aren’t professional accountants. A lot of sustainability engagements are being performed by those who are not licensed, and IESBA’s new framework would be applicable to those individuals as well.

The independence requirements for sustainability assurance engagements will likely be subject to IESBA’s more stringent independence requirements applicable to financial statement audits and reviews. Currently, they are subject to the less stringent requirements applicable to other assurance engagements. This anticipated shift will be a drastic change to current procedure.

Headway is being made on ethics in ESG reporting. Information about the projects should be available as the year progresses, and CPAs can anticipate an exposure draft being approved by the IESBA in December 2023. 

¹ “The Rise of ESG Accounting and What it Means for Auditors,” Thomson Reuters (Dec. 6, 2022).  
² Gerald Ratigan, “The Ethics of ESG,” Strategic Finance (April 1, 2022).  
³ Ibid.  
⁴ Michael Cohn, “IESBA Advances Sustainability and Ethics Standards for accountants,” Accounting Today (Dec. 23, 2022). 
⁵ Ibid.
⁶ Toni Lee-Andrews (Host), “Digital Assets, Public Interest Entities, and More,” AICPA’s Ethically Speaking (podcast episode 66, May 11, 2023).  
⁷ Sustainability, IESBA. 
⁸ Toni Lee-Andrews (Host), “Proposed Updates to the Code of Professional Conduct,” AICPA’s Ethically Speaking (podcast episode 65, Feb. 23, 2023). 

Heather Demshock, CPA, CMA, is an associate professor of accounting at Lycoming College in Williamsport, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at demshock@lycoming.edu.

Environmental, social, and governance (ESG) measures continue to gain momentum as businesses are being called upon to disclose their performance and strategies around ESG efforts. (See the feature in the summer 2023 Pennsylvania CPA Journal on ESG reporting.) Accounting is playing an increasingly important role as ESG initiatives can impact many aspects of a business, including financial reporting and taxes.

In 2021, the Financial Accounting Standards Board (FASB) published the following possible impacts of ESG on a company’s financial statements:

• ESG matters may directly affect amounts reported and disclosed in the financial statements. For example, the recognition and measurement of compensation expense.
• ESG matters may indirectly affect the financial statements. For example, an entity may suffer reputational damage from an environmental contamination that reduces sales.
• An entity may consider certain ESG matters as an input to an accounting analysis. For example, a material decline in demand during the reporting period may be a consideration when estimating future cash flows used in a long-lived asset or goodwill impairment analysis.
• Risks and opportunities related to ESG matters may have unfavorable, favorable, or neutral effects on financial statements.
• Other ESG matters may not have any material effect on the financial statements.

Additionally, the following tax impacts were noted:

• Tax credits for energy-efficient buildings, electric vehicle charging stations, carbon recapture, and investing in and producing solar and wind power.
• Tax credits for employer-provided childcare facilities or for investing in low-income neighborhoods and building affordable rental housing.¹

The consequences of failing to properly address ESG risks and rewards are considerable. Accountants who are responsible for ESG reporting and disclosures need to prioritize sustainability and commit to incorporating ethical standards throughout the process.² Organizations such as the International Ethics Standards Board for Accountants (IESBA) is taking the lead in promoting and aligning business ethics with ESG.

One of the biggest ethical challenges is determining how to present credible information.³ With a lack of standardization, businesses are speaking different languages when it comes to ESG reporting and sustainability disclosures. Competing frameworks and various terminology throughout the workflow can create an ethics trap if the accountant is not careful. 

In February and March 2023, AICPA’s Professional Ethics Executive Committee (PEEC) discussed new IESBA projects on sustainability and the use of experts. The sustainability project will provide independence standards for assurance practitioners as well as ethics provisions relevant to sustainability reporting and assurance.⁴ The use-of-experts project involves specific independence provisions regarding the use of experts by businesses, as well as in the context of audit and assurance engagements, particularly sustainability assurance.⁵ Once released, these standards will provide a tangible framework for use in ESG reporting. 

There are two different aspects of the IESBA’s Task Force on the Use of Experts efforts: on ethics and independence requirements for sustainability assurance providers, and ethics requirements for those preparing sustainability information.⁶ IESBA’s task force is working with other global standard-setters in the field of sustainability reporting and assurance, including the International Auditing and Assurance Standards Board (IAASB) and the International Sustainability Standards Board (ISSB).⁷

The IESBA gave updates at PEEC’s first and second quarter meetings regarding its projects. The IESBA plans to approve an exposure draft at its December 2023 meeting. Both the sustainability and use-of-experts projects have held numerous roundtables to solicit feedback from stakeholders to help guide the revisions being completed throughout 2023.

In relation to sustainability, the task force is looking at how the ethics code can be enhanced, not just from an independence perspective, but also from a general ethics perspective that includes integrity, objectivity, and confidentiality. The use-of-experts project is not limited to sustainability, but because it has a strong tie to sustainability it is on the same trajectory. This project looks through the integrity and objectivity lenses of what should be considered when using an expert.⁸

There were a few key takeaways from the IESBA meeting in March, as noted by PEEC. First, revisions to the code of ethics will be profession-agnostic. That is to say, the sustainability reporting ethics requirements will apply to professional accountants and those who aren’t professional accountants. A lot of sustainability engagements are being performed by those who are not licensed, and IESBA’s new framework would be applicable to those individuals as well.

The independence requirements for sustainability assurance engagements will likely be subject to IESBA’s more stringent independence requirements applicable to financial statement audits and reviews. Currently, they are subject to the less stringent requirements applicable to other assurance engagements. This anticipated shift will be a drastic change to current procedure.

Headway is being made on ethics in ESG reporting. Information about the projects should be available as the year progresses, and CPAs can anticipate an exposure draft being approved by the IESBA in December 2023. 

¹ “The Rise of ESG Accounting and What it Means for Auditors,” Thomson Reuters (Dec. 6, 2022).  
² Gerald Ratigan, “The Ethics of ESG,” Strategic Finance (April 1, 2022).  
³ Ibid.  
⁴ Michael Cohn, “IESBA Advances Sustainability and Ethics Standards for accountants,” Accounting Today (Dec. 23, 2022). 
⁵ Ibid.
⁶ Toni Lee-Andrews (Host), “Digital Assets, Public Interest Entities, and More,” AICPA’s Ethically Speaking (podcast episode 66, May 11, 2023).  
⁷ Sustainability, IESBA. 
⁸ Toni Lee-Andrews (Host), “Proposed Updates to the Code of Professional Conduct,” AICPA’s Ethically Speaking (podcast episode 65, Feb. 23, 2023). 

Heather Demshock, CPA, CMA, is an associate professor of accounting at Lycoming College in Williamsport, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at demshock@lycoming.edu.