Big 4 Firms Are Fighting Engineers Over the Right to Bill Clients For Climate Disclosure Audits

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Interesting piece over at the Wall Street Journal this morning about environmental disclosures or, more significantly, who gets to charge clients for auditing this data under SEC climate disclosure rules proposed in March. Read:

Firms that verify businesses’ climate data are at odds over who is qualified to perform the work, a pivotal and potentially lucrative task under a proposal from the Securities and Exchange Commission that would require new disclosures on the topic.

The U.S. securities regulator in March said it wants companies to seek independent certification of certain new disclosures, including estimates of greenhouse-gas emissions from their operations and from the energy they consume. The assurance requirement would apply to companies with at least $250 million in publicly traded shares.

Only certified public accountants can audit public companies’ financial statements, per U.S. securities laws. But, under the SEC’s proposal, the attestation report could be prepared not only by external auditors but also by other service providers, such as an engineering, consulting or certification firm. The Big Four accounting firms—Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers—are pushing for narrower criteria on who can perform this duty, according to letters sent to the SEC as part of a public consultation that ended last month. Meanwhile, some non-accounting firms say technical expertise is important, and other observers say the market is big enough for both types of firms.

Under the proposed rule, a registrant would be required to provide disclosures about GHG emissions (with attestation for Scope 1 and Scope 2 disclosures), certain financial statement disclosures, and qualitative and governance disclosures within its registration statements and annual reports (e.g., Form 10-K) [Deloitte]

Audit firms say this work is best left to them what with being experts in audits and all and if The Powers That Be don’t see fit to assign it to them then the non-accounting firms providing climate attestation should be registered with the PCAOB same as accounting firms are. Last year, only 6% of S%P 500 companies used an accounting firm to verify ESG information; 47% hired non-accounting firms to do this. The non-accounting firms “often charge less” said Derryck Coleman, director of research analytics at Audit Analytics.

State licensure laws might even prevent professionals other than CPAs from performing these services, said PwC.

KPMG suggests that being familiar with supplementary information makes audit firms more cut out for this work:

KPMG said the SEC should clarify whether all practitioners would be required to consider certain supplementary information as CPAs do. Accountants have to identify inconsistencies between so-called other information and audited financial statements. Auditors’ “role is to serve the capital markets using professional skepticism and systems of quality control, along with experience in evaluating internal systems for processing data,” said Scott Flynn, KPMG’s vice chair of audit.

Engineering, certification, and consulting firms say they are better equipped to provide these services because they better understand environmental considerations. French certification firm Bureau Veritas is qualified to handle the task because of its employees’ engineering backgrounds, which means it can attest to the validity of the data and weigh in on companies’ plans to reduce carbon emissions, said Marc Boissonnet, executive vice president of corporate and external affairs. “You need much more than audit tools,” he said. “You need people who are qualified in technical aspects and need to know the sector they are assessing.” Bit of a weak argument no? Deloitte audits a “British-based company leader in porcine and bovine genetics market,” that doesn’t make them experts in jacking off bulls (hopefully not).

The non-accounting firms believe there’s plenty of work for everyone so no need to sic PCAOB watchdogs on these non-registered firms. “When the demand for attestation is so high, it is important that we give companies as many options as possible to meet both the voluntary and regulatory disclosure requirements,” said Beth Wyke, global head of corporate assurance at London-based ERM.

Providing these services could end up being quite profitable for Big 4 firms, makes sense they’d want the work. The comment period for Proposed Rules on Climate-Related Disclosures — or as its known on the dog show circuit Release Nos. 33-11042; 34-94478, “The Enhancement and Standardization of Climate-Related Disclosures for Investors” [PDF] — ended June 17. The proposed rule is, thus far, widely disliked by those who would have to pay to be in compliance with it. Stay tuned.

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