ACCOUNTING - It's no longer just a numbers game, so some areas of

At the end of February, Michael Meacher, the minister for the environment, handed out the Association of Chartered Certified Accountants’ 1998 Environmental Reporting Awards. And, just after this magazine hits your desk, the Global Sustainability Reporting Initiative is due to launch an exposure draft on sustainability reporting guidelines for companies. These two events underline the fact that in the near future corporate reporting won’t be what it used to be. Environmental accounting, as pushed by ACCA since 1991, may be old hat, but social and ethical reporting are still emerging, and the effects the changes will have on the role of financial directors and auditors are not yet clear. What is clear is that financial information is no longer the be all and end all. In response to shareholders’ desires for more information about the business and aspects of corporate governance, the content of the annual report has changed dramatically in recent years. In the early 1980s, annual reports comprised largely the audited financial statements and the statutory director’s report. But a recent review of 20 annual reports by large listed companies, carried out by the Auditing Practices Board (APB), found that the financial statements now comprise less than 40% of the pages. The operating review took up 25%, and remuneration reports, chairman’s statements and corporate governance reports took up the rest. The APB wants to emphasise that auditors – or at least auditors that the APB sets down rules and guidelines for – are becoming responsible for auditing a smaller percentage of the information that is released to the public. For instance, around 70% of FTSE-350 companies are making some sort of disclosures about environmental and social issues; one in five is releasing a separate environment report. BP, Shell, Scottish Power, Co-op Bank, Diageo and the Body Shop have all produced social reports, and BT is following suit. These companies are determined that their efforts should not be seen as spin doctoring. Talking about Shell’s Report to Society, chairman and chief executive Chris Fay, said: “It emerged from Shell’s long-standing commitment to the core principles of honesty, integrity and respect for people.” Similarly, Shell is adamant that environmental reporting is “part of an effective long-term business strategy and not something to be conveniently pigeonholed under PR.” This may be both admirable and true, but most members of the financial community – investment analysts and shareholders – still fundamentally want to know about two issues: liability and risk. When a company is seeking to raise money through an Initial Public Offering, those that are tempted to subscribe want reasonable assurance that there is no missing material liability or hidden exposure to risk. The analysts are not concerned about the detail of environmental performance; rather, they are forcing companies to look at the environment, and social and ethical concerns, from the perspective of reputational risk. Companies are trying to prevent, for instance, accusations that they are employing child labour in developing countries so that rich kids can make fashion statements, because the damage caused to the reputation of leading companies by such incidents can quickly destroy shareholder value. Analysts don’t require the detail of how workers are looked after – although companies are providing detail for others who do want it – but they do want assurance that management has integrated such risk issues into their strategy and processes. And companies are beginning to be in a position to give them that assurance in the form of adherence to quality standards such as ISO 4000, the environment management system, or SA 8000, a social and accountability standard from a US non-governmental organisation, the Council of Economic Priorities. Professional services firms are trying to cash in on some of these developments by setting up environmental consultancy services and offering products such as reputational risk surveys. These moves recognise that corporate reporting is moving towards triple bottom line reporting under the umbrella of sustainability, where financial, social and environmental issues are measured using discrete sets of indicators. In future, it will no longer be acceptable for a high profile company to have a good score on its financial indicators but perform poorly on social and ethical concerns. The next step is to integrate the three strands into some sort of synthesis or balanced scorecard approach, and to provide independent verification. Sitting alongside the financial auditors report, it is not too hard to envisage an environment and social auditor signing off on an annual basis. Who the environment and social auditors will be is probably up for grabs. The accountancy-based firms have been remarkably adept at increasing their skills and knowledge bases, but stakeholders may not wish to see the same old names again. But superficially at least, the accountants are embracing change. ACCA has recently announced a UK Social Reporting Award, to be run in conjunction with the Institute of Social & Ethical AccountAbility, starting in 2000. At the same time, the English ICA has been trying to lead a debate from the corporate governance angle under the heading “The 21st Century Annual Report”, which is examining different concepts of effective communication with shareholders and other stakeholders. It seems accountants may have come to accept that accounts are no longer purely the preserve of accountants, and that environment and social indicators are not the numbers that FDs and auditors have known and loved for so many decades. But although accountants may be doing good work in starting the debate rolling, there is still a lack of vision about the role of the FD and the auditor in this re-engineered corporate performance reporting world. Peter Williams is a freelance journalist.