How Can New Accounting Save the World?

By Cornis Van Der Lugt, Bill Baue and Ralph Thurm

“Accountants will save the world,” World Business Council for Sustainable Development President Peter Bakker provocatively proclaimed at the 2012 Rio+20 Conference – provided we “change the accounting rules.” The sentiment caught on, spawning the book Six Capitals, or Can Accountants Save the Planet? that proposed multicapital accounting as the solution to the problems caused by monocapital accounting (think Enron and the fall of Arthur Andersen.) Whether these lofty proclamations are being fulfilled remains an open question.

What’s the issue?

Rewind to 2006, when in response to Enron etc., the heads of the Big Four accounting firms came out with a statement in the Financial Times saying that “the financial reporting model of the 20thcentury has become redundant.” Two years earlier, The Economist opined that “Non-financial accounting is now too serious to be left to amateurs.”

There has been plenty of debate since the early 2000s on the shortcomings of both financial and non-financial reporting. This should not lead us to forget the enormous progress that has been made in establishing sustainability reporting and expanding non-financial disclosures on matters such as climate since the 1990s. But persistent questions about the impact of reporting, its (un)strategic nature and fragmented make-up highlights ongoing shortcomings at the level of underlying accounting systems. It certainly does not make for integrated thinking.

To help address these shortcomings, Reporting 3.0 convened an international group of accounting experts in 2016, and established its Accounting Working Group (AWG) to imagine what “New Accounting” could look like 20 years onwards. What emerged is an Accounting Blueprint with Recommendations for the evolution of a comprehensive discipline integrating financial accounting, management accounting and sustainability accounting to transform the existing fragmented approaches to accounting into what can be called “Integrated Accounting.”

Figure 1: Integrated Accounting (Cornis Van Der Lugt, Accounting Blueprint, Reporting 3.0, 2018)

Why it’s important?

This transformative change includes a facelift to some basic accounting tools, notably accounting statements employed in daily decision-making. The Blueprint considers the findings from experimentation in recent years with alternative statements and measurement tools (including non-financial impact assessment protocols), and suggests how these could logically be linked and integrated with mainstream accounts and statements.

The New Accounting approach and toolkit proposed by the Accounting Blueprint suggests a new, comprehensive and holistic way of looking at business performance and investment analysis. It signals a new way of defining performance and success, using a multi- or intercapital approach that applies key principles such as sustainability context, decision-usefulness and accountability.

Building on principles found in standards and frameworks such as IFRS, GRI, SASB and IIRC, the Blueprint defines a set of twelve Recognised Comprehensive Accounting Principles (RCAP) for New Accounting. We recognize the importance of getting a core, harmonised set of principles in place, highlighting also different interpretations of shared principles and normative gaps that need to be filled.

Figure 2: Recognised Comprehensive Accounting Principles (RCAP) for New Accounting (Cornis Van Der Lugt, Accounting Blueprint, Reporting 3.0, 2018)

How can you tackle it?

The Accounting Blueprintprovides thought-provoking ideas on how to deal with dilemmas reporting managers, accountants, analysts and standards setters face in dealing with difficult issues such as weighing diverse capitals, monetization, integrated valuation, external thresholds and bringing intangible assets to book. Our debate on New Accounting pushes the boundaries on how far quantification and monetization in planning, accounting and performance management systems can be taken. It draws lessons from crisis events of the last two decades. These have also illustrated the limitations of conventional financial numbers and the importance of narrative to tell a more strategic and faithful story.

What will you have achieved?

As you embark on a new set of integrated accounting principles and expanded statements, our 3.0 Accounting workstream provides you with ideas on how to improve your qualitative description of key aspects such as value creation model, corporate governance and integrated risk management, and by that also linking to issues discussed earlier in this series (and in other Blueprints).

The Blueprint Recommendations highlight challenges for accounting education and professional development. Do you work in sustainability, management accounting or finance? Do you consider yourself as an accountant? Do you work in teams with fellow accountants from other accounting subdisciplines?

If you can combine qualification in established standards with knowledge of emerging sustainability trends, you may have a bright future. During an online public dialogue on the Exposure Draft of the Blueprint in February this year, former IIRC chief executive Paul Druckman stated:

The sustainability accountants, those that work with the sort of indicators as recommended by GRI and SASB as well as those engaged with the social and natural capital protocols have a bright future as part of the future accounting regime.

What question will we discuss next time?

How can income statements be expanded into integrated P&L accounts to tell more complete performance stories? Please find part 16 here.

[Context of this series: This is part 15 of the Reporting 3.0 series that forms the basis of an Implementation Guide that summarizes the total value of Reporting 3.0 in implementing a future-ready sustainability strategy and disclosure approach, in line with the idea of a Green, Inclusive and Open Economy. By posting these articles here Reporting 3.0 seeks feedback in the writing process of the final document, to be released as Blueprint 5 at the 5th International Reporting 3.0 Conference in Amsterdam, The Netherlands, on June 12/13, hosted by KPMG, see www.2018.reporting.org]