In December 2019, the IASB released an Exposure Draft, General Presentation and Disclosures, as a replacement for the monumental IAS 1, Presentation of Financial Statements, as well as amendments for several other IAS’s. The objective is to “to improve how information is communicated in the financial statements, with a focus on information about performance [in] the statement of profit or loss. The Board is proposing limited changes to the statement of cash flows and the statement of financial position.” Profit and Loss would have three new subtotals including ‘operating profit.’ ‘Non-GAAP’ management performance measures would need to be disclosed in a note that explains why they are useful, how they are calculated, and include a reconciliation to IFRS GAAP. Guidance on improved disaggregation of information would assist companies in providing data that is easier for users to evaluate. Also, a better analysis of operating expenses and explanations of unusual income and expenses would be required.
 
In a letter dated August 6, 2020, the Financial Reporting Executive Committee (FinREC) of the AICPA responded to the IASB proposal. While applauding the IASB’s attempt “to provide structure and guidance on reporting of financial performance in the statement of profit and loss,” FinRec “believe[s] a final standard needs more structure and guidance to ensure appropriate levels of (1) operability and consistency within a company’s reporting, and (2) comparability to other companies’ reporting,” as well as a more fuller consideration of financing activities.
 
Specifically, FinRec indicated that while the statement of profit and loss in the proposal would have operating, investing and financing categories, these could cause confusion, since they are defined differently than categories with the same names in the statement of cash flow. Furthermore, for the statement of cash flows to have all interest in the financing section is not considered appropriate. Also, proposed disclosure of unusual items and management performance measures in financial statements would be too subjective and are better dealt with elsewhere. In the case of integral and non-integral associates and joint ventures, while FinRec supports separating them for reporting purposes, a set of factors for determining them would be clearer and more useful, rather than having specific definitions. Finally, for purposes of general presentation and aggregation/disaggregation, immaterial items should be disregarded.
 
FinRec stated that they appreciated “why IASB did not attempt to include nonfinancial measures (such as key performance indicators) in the scope, yet many companies and users view nonfinancial measures as critical information and desire some level of assurance over such measures.” Over the past decade, a number of frameworks and sets of standards for non-financial information have been developed and issued for consideration. Currently, regulators only require consideration and disclosure of factors that can have a material impact on an entity. Non-financial factors fall under this overall umbrella. 
 
A July 2020 study released by the United States Governmental Accountability Office found that nonfinancial issues are being reported to some extent, but that the overall coverage is inadequate, and that coverage of specific topics is inconsistent and not widespread. According to the study, the European Union as early as 2014 issued a directive for companies to report on ESG management using existing frameworks. (ESG stands for the broad spectrum of non-financial environmental, social and governmental issues). However, several updates have been required as well as voluntary guidelines, which have still been criticized as lacking standardization and specificity. The American Securities and Exchange Commission allows companies to determine which and how to disclose ESG issues using a principles-based approach, which relies on current law and enforcement measures to impel compliance. The study also noted that the Tokyo and Johannesburg stock exchanges have included ESG disclosures in their listing requirements.
 
The next needed step may be to create consensus around a universally accepted framework under which to report ESG issues. This approach has been used in the past, such as when the COSO framework was adopted to standardize internal control framework reporting. The frameworks most widely acknowledged are from the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI). That task alone may take much time and deliberation. (On July 13, 2020, the SASB and GRI announced a collaboration to work together). But once accomplished, specific guidelines, such as those developed by the SASB for 77 distinct industries should be pursued to attain closer comparability. The attainment of these goals will go far to improving comparable, investor useful information. But the cost companies will incur determining and incorporating such information is another factor that makes the process more difficult to accomplish. When the consequences of not addressing the non-financial issues becomes greater that the cost of accounting and disclosure, the way forward will become clear.
 
The drive toward transformation to an ESG-centric approach is widely held. A report from the World Economic Forum, New Nature Economy Report II: The Future of Nature and Business, published July 24, 2020, states that “COVID-19 is a stark reminder of how ignoring biophysical risks can have catastrophic health and economic impacts at the global scale.” According to the report, “over half of the global GDP, $44 trillion, is potentially threatened by nature loss.” The threat is analyzed through the broad impact on three socio-economic systems:  1) food, land and ocean use; 2) infrastructure and the built environment; and 3) energy and extractives. The good news is that the report’s recommendations could generate $10 trillion in business opportunities and 395 million jobs by 2030, through transitions detailed out in 15 economic areas, such as livestock farming and ranching, roads and railroads, and mining and quarrying.
 
Another thought leader, The Good Governance Academy, on July 15, 2020, published Integrated Thinking and Doing an Integrated Report, a report furthering the case for marrying financial and non-financial data using a format such as established by the International Integrated Reporting Council. Though planned before COVID-19 struck, the report notes that the current environment amplifies the need for expanding reporting criteria in this direction. 
 
Incorporating companies into the ESG process, the Institute of Management Accountants on June 18, 2020, released a C-suite report, Finance Function Partnering for the Integration of Sustainability in Business, that “provides a practical framework for finance and accounting professionals to serve as active business collaborators in sustainability initiatives.” The report accompanies a separate white paper, CFO as Value Creator: Corporate Finance and Accounting Leadership in Sustainable Business and the Integrated Enterprise, that “provides the basic insights about the finance professional's role in sustainable business.”
 
Rounding out the analysis of the ESG playing field, the AICPA’s Center for Audit Quality published The Role of Auditors in Company-Prepared ESG Information: Present and Future, a July 2020 report that describes how “auditors can serve in engagements to enhance the reliability of ESG information.” The report also includes considerations and questions for company boards of directors and investors.
 
While new refinements in reporting continue to develop, the guard against fraudulent reporting must not be neglected. Despite improvements in protections, scandalous financial activities still cast questions on the profession and the audit watchdogs. Wirecard AG, until recently a rapidly rising internet payment processing services phenomenon, is now becoming known as Germany’s Enron, following its June 2020 collapse. Just as Enron in America and Carillion in Great Britain led to the reformation of audit standards and the creation of new independent watchdogs in those countries, Germany is now facing a rude awakening to the shortcomings of audit firms, standards, and regulators charged with overseeing the audit profession.
 
Wirecard had been the subject of questionable practices for a number of years. As far back as April 2015, the Financial Times had challenged certain financial and accounting aspects of Wirecard’s operations. But even when more pointed accusations were made by the paper in February 2019, Germany’s Federal Financial Supervisory Authority (BaFin) initially went after the Financial Times for their reporting, instead of Wirecard. Though other investigations of the company ensued, not until the Spring of 2020 did the news of missing cash totaling some $2 billion lead to the total implosion of Wirecard and the arrest of top executives.
 
Whether the missing cash was not detected by the auditors, Ernst & Young, due to the elaborate fraudulent scheme, or merely to a lapse in basic audit procedures, remains to be determined. Also, BaFin and the Financial Reporting Enforcement Panel (FREP), Germany’s accounting watchdog, have come under question as to the effectiveness of their oversight. FREP has indicated that its powers are limited, which sounds eerily like the situation with Britain’s Financial Reporting Council (FRC), which in the wake of Carillion and other audit failures, is in the process of being replaced by a more robust new agency.
 
As if the cash manipulation scheme was not enough, new money laundering charges are now emerging against Wirecard as well. Only time will tell the ultimate ramifications as Wirecard takes its place among the devastating financial scandals of the twenty-first century.      
 
Further details can be found at CAQ Report Reveals How Auditors Enhance The Reliability of Company-Reported ESG Information  and Wirecard scandal will have cascading impact on Germany’s audit landscape.
(https://www.thecaq.org/new-report-reveals-how-auditors-enhance-the-reliability-of-company-reported-esg-information/) and (https://www.complianceweek.com/accounting-and-auditing/wirecard-scandal-will-have-cascading-impact-on-germanys-audit-regulatory-landscape/29158.article).
 

Periodic roundup of recent and upcoming actions and activities by audit and accounting organizations throughout the world.