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Bob Herz, Accounting Hall of Famer and former chairman of the FASB, explains an important part of his vision for the future of corporate reporting in America.

Nov 06, 2015

 

A household name in the standards setting community, Bob Herz has made history on several fronts, not the least of which has been as Chairman of the Financial Accounting Standards Board in the United States (2002-2010) at a time when the IASB and the FASB went through their rigorous process of harmonizing IFRS and US GAAP. At the time, Mr. Herz described the process as “riding two horses at the same time”.... a very tricky feat to say the least. Five years after his retirement from FASB, Mr. Herz is again on the forefront of international accounting standards setting, perhaps in an even trickier spot as a newly appointed member of the board of directors of the US based Sustainability Accounting Standards Board  (SASB).

 

When Bob Herz resigned as chairman from the Financial Accounting Standards Board in 2010, early retirement was not in the cards. In his words, over the last five years, “my dance card has been full”.

 

In addition to his lecturing schedule at Columbia University, Bob sits on the board of directors of Morgan Stanley, Fannie Mae, Workiva Inc. and others, as well as on the advisory boards of several companies and regulatory bodies such as the Canadian Accounting Standards Oversight Council (AcSOC).

 

Making room for his most recent role as a member of the board of directors of the Sustainability Accounting Standards Board (SASB) was clearly not due to a lack of other things to do, but rather reflects a long standing passion for improving corporate reporting world-wide. [The Sustainability Accounting Standards Board (SASB) is an independent US-based accredited standard setting organization that develops industry specific standards for voluntary use in disclosing material sustainability issues in filings to the Securities and Exchange Commission (SEC). The SASB is a not-for-profit organization based in San Francisco, and is not affiliated with the FASB or the US Securities and Exchange Commission. By early 2016, it is expected that the Board will have developed provisional sustainability accounting standards for over 80 industries in 10 sectors.]

 

This new initiative for Bob, while seemingly off-the-mark in terms of traditional standard setting, is anything but a side-line. While most of us know Bob as the force majeure behind standards reform in the US, his enthusiasm for non-financial reporting has its roots in early days.

 

In 2001, Bob co-authored a book with Bob Eccles (the first chair of the Sustainability Accounting Standards Board), entitled The Value Reporting Revolution – Moving Beyond the Earnings Game” 1   where he explains key non-financial performance indicators in relation to the value drivers of businesses. “I was kind of into that whole thing’, says Herz, in regard to understanding what is commonly considered the “hidden” or more intangible measures of the corporate value. I’ve devoted a lot of my professional career to trying to improve the information that goes to the capital markets, he adds, and I’ve had a long standing belief that financial reporting is very important part of that, but it’s not all that’s needed”.

 

When it comes to determining the underlying sustainability of a company, or their capacity for growth you’ve got to look at more than financial reporting if you want to understand what creates value over time, or what can destroy value over time, he says. “ When I was a Partner at PwC, and before I became chairman of the FASB or a member of the SASB, I advocated for more systematic reporting of information on key value drivers , so my interest in the subject of sustainability reporting goes back a long way.”

 

“I am not a tree hugger or an environmental activist, just a citizen of this planet concerned about the welfare of future generations.  So, as someone with a passion for helping bring about positive changes in accounting and reporting, the realm of integrated reporting and accounting for sustainability represents a new frontier of accounting changes.”  2

 

Bob’s role as board member at the SASB is multi-faceted, but as he explains, his experience with FASB adds an important perspective.  SASB has come a long way since it was established a few years ago, and it’s developed a good set of processes for developing provisional standards on an industry by industry basis, he notes. “However, where I think I can add value from my standard setting experience, is to help develop a process to finalize those provisional standards – looking at how people view them, whether they’re cost effective and can be done in practice, and, very importantly determine what investors think.” SASB will soon be piloting its disclosures with various companies as part of a robust program to finalize its standards.

 

The SASB is approximately two thirds of the way through the completion of their provisional standards to 2016. The road forward as Herz explains, will be to determine the right metrics that are useful for the investor community, and hopefully, he says, “as more people use the standards, they will become generally accepted, companies will see the benefits,  and investors will ask for this information to be included  in SEC filings. “

 

When asked whether he expected a more formal relationship to evolve between the SASB and the SEC, Bob points to the current make-up of the board. “As you know, our Vice Chairman is Mary Shapiro, former Chairman of the SEC, and we also have two other former Commissioners, Aulana Peters and Elisse Walter.” He also notes that the SASB have been meeting regularly with SEC staff to keep them informed. “There’s clearly interest at the SEC, he explains, but it has to be an evolutionary process. They first have to see that there’s growing market acceptance and uptake and and as that occurs then the regulators may begin to consider mandating such reporting. “’

 

Words of advice from Mr Herz that might foreshadow things to come for corporate reporting in America, potentially with the force of the SEC……Mr Herz provides three key insights:

 

First, I’d encourage readers to go to the SASB website and learn about the process, read the standards and the accompanying industry briefs. You will see that we’re trying to get at finite sets of issues and metrics that really matter from an investment and value proposition on an industry by industry basis.

 

Second, while the sustainability folks in the company are usually involved in developing the information, ultimately it will have to be the finance function that makes the decisions on what they’re reporting   in the 10-K and on putting internal controls around that information.

 

Third, at SASB we’re designing the sustainability reporting standards so that the information can be audited. If the markets want more assurance on this, we would want the auditors to be able to provide that assurance. And ultimately, capturing the essence of material issues, is the key consideration along with cost benefit. “

 

When considering the potential future direction of corporate reporting in the US, it also helps us to remember Bob’s long-standing relationship with the UK.  In addition to his close relationship with the IASB, and Sir David Tweedie specifically, Bob is a graduate of the University of Manchester and articled with PwC in Manchester and London. (Bob has since received an honorary Doctorate from the University of Manchester)

 

In terms of his continued reach across the pond, Bob also explains his connection to the recently developed Integrated Reporting Framework of the International Integrated Reporting Council (IIRC) as well as to St. James Palace.   Says Herz, “ I was fortunate to also be involved with the IIRC during the formative days of integrated reporting (IR). When I was Chairman of the FASB I was invited to the inaugural meeting of the IIRC in London and also became involved with the Prince of Wales’ Accountability for Sustainability project (A4S), which was one of the motivators for creating the IIRC. “ Through these connections with international organisations and individuals, he explains, “I’ve become much more aware of the potential magnitude and severity of these threats to our ongoing economic, environmental, social and planetary welfare, and of the need for better measurement and reporting as part of a global effort to address these issues. “

 

As for the reunion of the dynamic duo in directing the future of corporate reporting and disclosure says Bob, “I don’t want to speculate but I would say we’re both suckers for what we view as a good cause. We continue to share a common goal of trying to improve information for the global capital markets, see each other regularly and remain good friends. “

 

 1 Eccles, R.G., Herz., R.H., Keegan, E.M. and Philllips, D. (2001), The Value Reporting Revolution: Moving Beyond the Earnings Games, John Wiley, New York, NY

 

2 Herz., R.H. (2013) Accounting Changes:  Chronicles of Convergence,  Crisis and Complexity,  Linda Prentice Cohen NC. AICPA. NC p 261.

 

 

 

 

 

 

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