The Accountant-Jan-Feb 2017

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Financial reporting and assurance THE ACCOUNTANT’S EVER EXPANDING REPORTING RESPONSIBILITIES By FCPA Jim McFie, a Fellow of the Institute of Certified Public Accountants of Kenya The fourteenth session of the United Nations Conference on Trade and Development (UNCTAD) took place in Nairobi from Sunday 17th July to Friday 22nd July this year. On Thursday 21st July, there was a discussion on the International Standards on Accounting and Reporting (ISAR) “Highlevel Policy Dialogue on Sustainability Reporting” under the theme entitled “Building productive capacity to transform economies”. The UNCTAD secretariat pointed out that in the post-2015 era, resource allocation decisions need to be made with a new mind-set that puts the Sustainable Development Goals (SDGs) at the centre. This will have implications for enterprises and their reporting requirements and practices. In producing the goods and services that the global community consumes, enterprises utilize human, natural and financial resources that need to be recognized, measured and reported on, considering the targets and challenges of the SDG agenda. Policy makers, regulators, enterprises, financiers, and other stakeholders need to develop and agree on ways to enhance the role of accounting and reporting in assessing the contribution of the private sector towards attaining the SDGs. The session will facilitate an exchange of views on ways and means to enhance the role of corporate reporting as a tool to assess the private sector’s contribution to the SDGs. It will also contribute to gaining insights on main trends and challenges in the area of sustainability reporting, and strengthen institutional links with key stakeholders to facilitate progress towards the harmonization of accounting and sustainability reporting requirements. The discussion addressed the following issues: (a) Enhancing corporate disclosure and facilitating comparable and verifiable corporate reporting on SDG performance; (b) Promoting behavioural change at the enterprise level to support the attainment of the SDGs; and (c) Supporting SDGrelated investment decision making with reliable and comparable corporate disclosure. But some international accounting bodies, and multinationals, are also addressing an even more important topic: the question of human rights. Since 2008, when the UN Human Rights Council unanimously endorsed the UN Protect, Respect and Remedy (PRR) Framework, it has been globally accepted that businesses have a responsibility to respect internationally recognised human rights. The human rights in question address social, economic, cultural, civil and political concerns. They are expressed in the International Bill of Human Rights and the Declaration on Fundamental Principles and Rights at Work of the International Labour Organization (ILO). Divided into three pillars, the PRR Framework sets out the complementary roles of the private and public sectors regarding business and human rights: Pillar 1: States have a duty to protect, respect and promote human rights; Pillar 2: Companies have a responsibility to respect human rights; and Pillar 3: Victims of business-related harm should have access to a remedy In establishing the ‘corporate responsibility to respect human rights’, Pillar 2 describes a fundamental responsibility of all enterprises irrespective of their size, purpose of business or where they operate. Importantly, this responsibility exists irrespective of a government’s ability to protect, respect and support citizens’ rights (Pillar 1). The UN PRR Framework was enhanced in 2011 when the UN Human Rights Council unanimously agreed the Guiding Principles on Business and Human Rights (henceforth the Guiding Principles). They detail how the UN Framework should be interpreted and provide top-level guidance on implementation. Today, they are the de facto standard for what constitutes good corporate behaviour. Many different types of organisations around the world, including large and small enterprises representing diverse industry sectors, accept, endorse and use them in their day-to-day activities. The PRR Framework and Guiding Principles mark a significant moment in history. For the first time, it is globally 4 JANUARY - FEBRUARY 2017
Financial reporting and assurance accepted that companies should consider and proactively assess the human rights impacts associated with their business actions, activities and relationships. Where relevant, they should address how they impact the lives of all their stakeholders, irrespective of the national laws where they operate. The expectation that organisations must ‘know and show’ is central to both the PRR Framework and the Guiding Principles. Companies should be able to demonstrate that they understand their impact on the human rights of their stakeholders. Both instruments outline a practical framework of human rights due diligence, which should dovetail with the existing risk-management processes that businesses operate. A human rights due diligence process is intended to identify, prevent, mitigate and account for how a company addresses its adverse human rights impacts. It is based on four key steps: Step 1: Assessing actual and potential human rights’ impacts; Step 2: Integrating and acting on the findings; Step 3: Tracking responses; and Step 4: Communicating about how impacts are addressed. While accountants may not be directly focused on conducting a human rights due-diligence process, they should still be aware of what it is and its key role in identifying the company’s human rights risks and impacts. Depending on the organisational structure, the actual process may be undertaken by sustainability/ corporate responsibility teams, internal or external risk assessors or specialist consultants. It should, however, include input from people and functions from across the business. Accountants have a major role in considering how a due diligence process can be adequately resourced and managed to complement existing risk-management systems. They should also be involved in reviewing findings and acting on any issues that come to light. Since 2011, there have been increasing signs of diverse and influential organisations around the world accepting the Guiding Principles. These are manifested in various ways, from adoption, adaptation and implementation to their use as the inspiration behind similar initiatives to guide and influence the actions of others. Evidence of action indicates a move towards alignment and convergence. To underscore ‘acceptance in practice’, various organisations have taken steps to either apply or adapt the Guiding Principles according to their geographical, sectoral or operational circumstances. Accountants should have the skills to develop risk reviews and corporate processes, often working with multiple and complex scenarios. With their professional objectivity, they are well placed to contribute to auditing and monitoring policies and actions. They can also help in the execution of strategic initiatives. When it comes to safeguarding reputation, such scrutiny is crucial. Accountants should be able to map out risk and opportunities, enabling them to engage with the Guiding Principles and identify both how their business might impact human rights and how human rights abuses might impact their business. To do so, they must manage and draw insights from corporate information and metrics. Companies already engaging in responsible business practices and applying human rights frameworks will gain significant advantage over those failing to recognise their importance. Companies also need to be confident in explaining new priorities to a wide range of stakeholders, supported by metrics that clearly justify their decisions. Having a clearer understanding of the implications of human rights to the business will also help financial decision making by highlighting areas where investment is required and enabling the evaluation of procurement options and performance. In recent years, non-financial factors have become a required element of corporate reporting. Finance professionals have a key role in identifying, measuring and analysing information that helps explain how their business creates value, both for itself and for wider society. Accountants must recognise their ethical and professional responsibilities, both to the codes of their professional body and particularly in relation to delivering objectivity, independence and JANUARY - FEBRUARY 2017 5
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