Dan Goelzer, practicalESG.com Advisory Board member, SASB Board member, former Baker McKenzie partner, inaugural Chair of the Public Company Accounting Oversight Board (PCAOB) and generally nice guy, has published his latest Audit Committee and Auditor Oversight Update. As usual, this update has lots of great information for audit nerds like me. Two particular items in this issue relate to his perspectives on emerging matters for Board oversight of ESG accounting and controls/procedures for disclosures.
Concerning accounting, Dan says:
Audit committees should consider whether their company’s disclosures and commitments concerning climate change and other ESG matters have material accounting implications and, if so, whether those implications are properly reflected in the financial statements. As the CAQ and Deloitte reports make clear, public commitments to achieving carbon neutrality or net zero emissions can have significant financial statement consequences, particularly with respect to the value and impairment of existing assets. Commitments to make major changes in the company’s products or supply chain for climate-related reasons may also affect financial reporting. Senior executives who make such commitments are not always aware of the financial statement implications for their public declarations. Audit committee attention to the links between corporate sustainability policies and financial reporting is particularly important because of the increasing attention that investors, interest groups, and regulators are paying to these issues.
It would not be surprising if the SEC were to bring one or more enforcement actions based on allegations that companies have made climate-related commitments without reflecting those commitments in their financial statements in accordance with GAAP.
With regard to internal controls, he offers:
Audit committees that are not already doing so should focus on what ESG disclosures the company is making, how the information is collected, and how these disclosures impact financial reporting. Controls and procedures are an especially important area because, as PwC suggests, ESG disclosures are often not subject to the same types of controls that govern other company disclosures. PwC’s analysis of the audit committee’s ESG disclosure oversight role and its suggested questions could be a useful tool for audit committees in assessing management’s ESG disclosure progress.
He is right on both points in my view. Audit Committees need to be ready to play an important role in ensuring ESG information disclosed is accurate and investor-grade.
