BUSINESS SUSTAINABILITY AND ACCOUNTABILITY REPORTING

1. BUSINESS SUSTAINABILITY AND ACCOUNTABILITY REPORTING Zabihollah Rezaee, PhD, CPA, CMA, CIA, CFE, CGFM, CSOXP, CGOVP, CGRCP And James M. Lukawitz, PhD, CPA The University of Memphis 2011 Global Finance Conference in Bangkok, Thailand, April 3-5, 2011

2. Introduction • In today’s business environment, global businesses are under close scrutiny and profound pressure from lawmakers, regulators, the investment community, and their diverse stakeholders to focus on sustainability and accept accountability and responsibility for their multiple bottom lines (MBL) of economic, governance, social, ethical, and environmental (EGSEE) performance. • Sustainability is the process of integrating economic, governance, social ethics, and environmental (EGSEE) dimensions into all the decision-making and accountability processes and measuring and reporting log-term and enduring performance in all EGSE E areas. • This definition suggests that all sustainability performance factors (EGSEE) add value and thus internalizes some environmental, ethics, governance and social factors that have not traditionally been reported in the conventional corporate reporting. • Business sustainability is a process of enabling organizations to design and implement strategies that contribute to enduring performance in all EGSEE areas. • Business sustainability not only ensures long-term profitability and competition advantage but also help in maintaining the well-being of the society, the planet and people. • Business sustainability and corporate accountability is all about adding value in all areas of economic, ethics, governance, social and environmental (EGSEE) matters and events. • Many public companies are now voluntarily manage, measure, recognize and disclose their commitment and events and transactions relevant to EGSEE.

3. Proposes Of presentation • Define Business Sustainability. • Discuss Dimensions of Business Sustainability (EGSEE) and Demand for EGSEE performance • Present Accounting and Assurance of Sustainability Reporting. • Present Results of a Survey Conducted To Determine the Value of Sustainability Reporting. • Much of the Presentation is from Z. Rezaee “Business Sustainability and Accountability Reporting” forthcoming Book, John Wiley & Sons, 2011.

4. Demand for Business Sustainability • The 2007-2008 financial crisis, its resulted economic downturn and regulatory responses along with global competition encourage organizations of all types and sizes to pay a keen attention to their sustainability programs composes of EGSEE activities. • In the post-financial crisis and new regulatory framework era, corporations are under more pressure from variety of stakeholders to provide accurate, reliable and relevant financial and non-financial information pertaining to their economic performance, strategic objectives, governance, risk and social responsibility. • On May 4, 2010, the International Federation of Accountants (IFAC) and the Prince’s Accounting for Sustainability (A4S) Project agreed to collaborate in promoting sustainability organizations . • Particularly the IFAC and A4S’ sustainability project addresses: • “Raising awareness and facilitating sharing and collaboration across the global accountancy community, for example, through the development of a community website for professional accountancy organizations, business leaders, academics, and other experts to exchange ideas and share good sustainability practice; • Establishing an international integrated reporting committee to develop a new reporting model that will better reflect the interconnected impact of financial, environmental, social, and governance factors on the long-term performance and condition of an organization; and • Incorporating accounting for sustainability within professional training and education.”

5. What sustainability means in practice? • Minimize or eliminate negative impact on nature and natural resources • Apply natural processes and technologies, which regenerate nature • Respect human and social values and interests (employees, consumers, local communities) • Listen to signals from society and environmen. The balance of ecological and social footprint

6. The business model for SustainabeDevelopment Aligning business interests with the needs ofsociety

7. Solvent management of business Social, environmental, economic, .. Public Commitments Governance, financial, risk management... Innovation “Better products and services for a better world” Sustainable development for a multinational company Transparency Accountability and Sustainable Development “Intelligent communication” Long Term

8. Benefits of SustainabeDevelopment strategy • Helps Opportunity to detect new products and services “Better products for a better world” • Efficient way to transmit and strengthen business culture • Useful tool to manage risk properly … … in a changing world • Key issue to make an impact on our positive reputation • Way to share useful information with stakeholders…

9. Advantages of applying corporate sustainability • Helps preparing for environmental and social risks as well as for seizing business opportunities • Implementing substantial cost savings • Inspires creativity for developing new products and services • Reaching new markets and customers • Strengthens corporate image and reputation internally and externally • Motivation for the employees • Differentiates from competitors • Positive social and/or environmental impact

10. Major obstacles • No real understanding of the importance of SD by managers • Confusion around CSR and sustainable development • Lack of real pressure from demand side (consumer awareness) • No obvious links between corporate sustainability and financial performance • Lack of generally accepted benchmarks and indicators for measuring coprorate sustainability

11. Main areas • Energy and climate change • Poverty and inclusive business • Business role in tomorrow’s society • Ecosystem services • Technology and innovation • Accountability, transparency, governance • Human rights • Corporate social responsibility • Ethical behavior

12. Entity Performance Performance Governance Economic Ethical Social Environmental Goals Roles and Responsibilities of CG Participants Value creation and Enhancement for all Stakeholders Ethical and Moral Values Social Issues regarding Products and Services Performance Codes of Conduct Social Responsibility Report Environmental Management and Report Reports CG Report Financial Reports Assurance Report Assurance Report Environmental Audit Report Assurance Assurance Report Audit Report

13. Accounting for business sustainability • Accounting for business sustainability is the process of identifying, classifying, measuring, recognizing and reporting performance in all areas of EGSEE. • Accounting for sustainability is often referred to as “green accounting” or “green reporting”. Nonetheless, it covers all areas of economic viability, ethical culture, corporate governance, social responsibility and environmental awareness.

14. Assurance Standards in Sustainability Reporting • Assurance standards on different dimensions of sustainability performance very in terms of vigorousness and general acceptability. • auditing standards either PCAOB Auditing standards in the United States of International Auditing and Assurance Standards (IAAS) governing reporting and assurance on economics activities. • Assurance standards on other dimensions of sustainability including governance, ethics, social and environmental standards are yet to be fully-developed and globally accepted. • The International Standard on Assurance Engagements (ISAE) 3000 issued by the IAAS Board in 2004 provides guidance for assurance on non-financial dimension of sustainability. • AA1000AS issued in 2008 by the AccountAbility (AA) a global nonprofit organization that established management, reporting and assurance guidance for nonfinancial dimensions of sustainability performance. • American Certified Public Accountants (AICPA) AT 101. • The Canadian Institute of Charted Accountants (CICA) Handbook Section 5025.

15. Method and Procedures • Three methods are used in gathering data pertaining to sustainability reporting. • First, we review the related literature, including published papers and publications of professional organizations, in gathering information in developing different sections of the questionnaire. • Second, we conduct a survey of accounting practitioners participated at the professional meetings of local chapters of Certified Public Accountants (CPA), Institute of Internal Auditors (IIA) and Institute of Management Accountants (IMA) in both Midsouth and Southwest regions. • We prepared, pilot-tested, revised, and then submitted the questionnaire to the participants. • The instrument was pilot-tested using an MBA class in the Midsouth region of the United States. • Finally, we examined the financial statements for the Fortune 100 US Companies to determine their sustainability disclosures and their use of the GRI procedures.

16. RESULTS • Respondents were asked to indicate the importance of several aspects of corporate reporting. • Attributes of corporate reporting listed in Table 1 can be classified into three- tier aspects. • Tier one consists of four attributes considered the most important with the mean responses of greater than 4.25. These attributes are: (1) auditor report on financial statements; (2) auditor report on internal controls; (3) management certification of internal controls; (4) management certification on financial statements.

17. Table 1 Sustainability Reporting

18. Results The second tier consists of attributes 5-8 in Table 1, which are considered somehow important with the mean responses of greater than 3.9. These attributes are: (1) management disclosures and analysis (MD&A); (2) information pertaining to executive’s performance and compensation; (3) financial key performance indicators (KPIs); (4) corporate governance information (board effectiveness).

19. RESULTS The final tier consists of attributes 9-15 in Table 1 with the mean responses of between 3.85 and 3.52. These attributes of corporate reporting which are considered least important by respondents are: (1) ethical responsibility performance information; (2) financial information on economic events; (3) strategy information (goals, objectives, plans); (4) market information (growth, market share, stock prices); (5) social responsibility information (customers, people, innovation); (6) nonfinancial key performance indicators (NKPIs); (7) Environment responsibility performance information.

20. RESULTS • An examination of the annual reports of the Fortune 100 Companies shows that: • fifty-nine of them have some sustainability disclosures. • When broken into quintile, it is noteworthy that sixteen of the largest twenty firms report on sustainability, while only six of those in the lowest quintile have any sustainability reporting. • GRI is the overwhelming choice among disclosing firms with thirty-eight (including thirteen from the first quintile) firms using this method.

21. Table2Fortune 100 Sustainability Reporting

22. CONCLUSION • Investors do appear to value these sustainability disclosures, however; they value them lower than the traditional financial disclosure information. • This would support the theory that sustainability concerns and disclosures should only be of concern to a business only after financial viability has been well established. • Furthermore, based on the examination of the annual reports, the GRI index does seem to be establishing itself as the standard for these disclosures. • Future research needs to investigate the cost/benefit of these disclosures and whether these disclosures should remain voluntary or should become required disclosures.