Accounting firm? Numbers alone are no longer enough

Who recently hired their accounting firm? Mark Vaessen, head of sustainability reporting at KPMG, sums up: “Including marine biologists, food scientists, human rights lawyers, earth scientists and chemists.”

Due to new European legislation, accountants will soon also have to ‘find’ something about how companies perform in the field of climate impact, biodiversity and diversity. The CSRD guideline will come into effect gradually from 2024. As a result, companies will soon have to provide much more information in their annual report about their business operations in the areas of the environment, society and good governance – what is referred to as ESG, after environment, social and governance. Think of their CO₂emissions, water consumption and the distribution of leadership positions between men and women.

The first companies to report according to the CSRD guideline are listed companies with more than 500 employees. The new rules apply to the 2024 financial year. For ‘ordinary’ large companies, the legislation will come into effect a year later. A company is considered ‘large’ if it meets two of three criteria: a balance sheet total of at least 20 million euros, a net turnover of at least 40 million euros and/or at least 250 FTE personnel. The CSRD rules apply to the annual report, not to the annual accounts.

Are companies prepared for this? And are they accountants, if they will soon have to check the annual reports on those points? Traditionally, the accountant is responsible for auditing the figures in annual accounts and reports. Accountants from three large firms (PwC, Deloitte and KPMG) talk about the impact that the legislation has on their organization – already now.

Compare better

“The new guideline should make it much clearer to shareholders, employees, suppliers and anyone who reads an annual report how a company is performing in terms of sustainability,” says Gera Hamer, managing partner in the accounting division of Deloitte. “In the past, really large companies also reported in this area, but now there are clear and extensive rules. Ultimately, this will result in more transparency, and companies will be much easier to compare with each other.”

The legislation has a major impact on accountancy firms. For example, in KPMG’s audit teams (in jargon: the audit teams), almost one in five people is now not an accountant, but a ‘substantive specialist’ who supports the team – an earth scientist, for example, or a human rights lawyer.

The new law also calls for more training of ‘regular’ accountants, say the firms. “We will soon be launching an extensive training program for accountants,” says Arjan Brouwer, head of PwC’s professional engineering office in the Netherlands. “To illustrate how big this is becoming: last year we had twenty companies assurance [een beoordeling] information about non-financial information. We don’t know exactly, but we think that number will go towards two hundred in the coming years. If not more.”

Collect evidence

The difference is still in the audit by accountants of the financial part and of the CSRD report. Accountants must include the latter in their statement in the annual report limited assurance to give. In the case of financial information, this is a firmer judgment: so-called reasonable assurance. “The difference has to do with how much evidence we have to collect that it is exactly right,” says Brouwer. “We analyze the information, discuss it with management, do limited research into the sources behind the figures, but do not have to do random checks to a lesser extent, for example.”

The fact that accountants are not yet required to provide the same level of assurance is because companies often find it much more difficult to provide precise information about climate or diversity, says Vaessen. That makes checking more difficult. “In financial reporting, everything is expressed in money, for example euros or dollars. Every country where a company has factories reports to the head office according to a fixed format. This is processed in the annual accounts at the head office.”

For the non-financial part of the annual report, internal reporting is very different, says Vaessen. “The information has to come from all sorts of different systems. Information about emissions can, for example, come from measuring equipment. Information on gender ratios, age groups and ethnic backgrounds, especially from HR systems. Offices in different countries work it out in spreadsheets, and then it is collected centrally. But there is much more risk of error.”

Bee populations

This also makes it more difficult for accountants to verify. “There are normally connections between, for example, incoming and outgoing cash flows,” Brouwer explains. But making these kinds of connections with non-financial information, such as sustainability and good governance, is difficult. “If a company says: in this factory five people were injured during production last year, as an accountant I have little means to know: no, it was eight. If a company does not register and report this itself, the question is whether you will find out.”

Moreover, says Brouwer, climate information often involves estimates. “Take scope 3 emissions, i.e. the emissions from suppliers or customers with your product. How many emissions are associated with cars you have sold? Well, do they drive it for ten years, or twenty, do they drive a lot or a little a year? And do they drive economically or ‘sporty’?”

The European Commission is now working on rules that should provide as much clarity as possible about how companies should make their calculations. They do not have to report on everything, but must choose what is most important given ‘the context’ of the company. “There is quite a bit of judgment in the CSRD,” says Vaessen. “Imagine: you are a large coffee producer, with many coffee plantations. So you have a lot of impact on nature. Do you also have to report on the impact on bee populations? And how does that relate to the working conditions on, for example, a plantation in Peru? Which of the two should you report on?”

All three offices say they receive by far the most questions from companies about this. It will have to show itself a bit. “In the first year that the annual reports are published,” says Vaessen, “everyone from the same industry will sit and look at each other. Okay: that competitor did say something about the bee population, why not us? Ultimately, this will make annual reports more consistent and more similar.”

Explain well

In any case, the accountants will ask companies to properly substantiate their choices and statements, they say. Brouwer: “That they explain well how they arrived at a number, and what the assumptions are that they made.”

Figures on sustainability are not easy to calculate, nor are they always easy to interpret. The same goes for something ‘simple’ like the CO₂company emissions. “A company must keep its absolute CO₂report emissions”, says Brouwer, “but the CO is at least as interesting₂emissions in relation to your turnover. Because if you sell a business unit, your CO decreases₂emissions without you doing anything about it.”

But even then you get a figure that requires context, says the PwC accountant. Due to inflation, companies automatically already have a CO₂reduction in relation to their turnover. After all, that turnover increased because products became more expensive. Less CO₂emissions in relation to turnover were therefore not due to CO₂reduction itself. Brouwer: “It is up to the companies to be clear, but it is also up to readers of an annual report not to stop at just a number and to take a good look: what is meant here?”

Still starting at zero

Will all companies be on time to comply with the rules? The accountants have their doubts about this. Broadly speaking, it is clear what needs to be done, but the precise standards of the European Commission may appear at any time, but are not there yet.

“Larger listed companies have usually been collecting information for some time,” says Brouwer. “But smaller listed companies and a lot of unlisted companies – they often have to start from zero. I think they will have trouble finding people who can help with this, especially as we get closer to the deadline.”

I have never experienced such a great transformation of the profession

Mark Vaessen head of sustainability reporting at KPMG

It is clear that it will also be a major change for accountants. “I have never experienced such a major transformation of the profession,” says Vaessen, who has worked at KPMG for 34 years. “It’s so wide. The subjects that we have to monitor affect society as a whole. It is really about whether we achieve our climate goals and whether people in distant countries receive a fair wage.”

His profession will become even more socially relevant, says Vaessen. “If I now tell my children that I am working on sustainability, it makes them much warmer than when I said in the past that I was working on international accounting standards.”

Read also: Become an accountant? Not many young people think about that

Hamer van Deloitte thinks that with this legislation accountants should seize the opportunity to make their profession more popular. Student numbers are declining in accountancy courses. “I have been working at Deloitte for thirty years and have found it very attractive work,” she says. “I just think that the young generation in particular has a great need to make a major impact on society. You can do that this way. Our professional group must seize the opportunity to interest more students in our profession.”

‘Lived’ sustainability

The new legislation will lead to more openness, the accountants think, but that does not mean that companies are becoming greener. Vaessen: “Companies must really make sustainability an integral part of their strategy. Otherwise it just becomes an exercise at headquarters level, where people are putting numbers together. Sustainability should not be a paper tiger, but should be ‘lived’ by the company.”

One way to do that is to include sustainability more in the remuneration of top executives, says Vaessen. “That you are judged on your CO₂reduction, not only on turnover and profit. That is super important, because then it will really come to life. We accountants cannot enforce that. It is up to the companies themselves to do that.”