People and Planet in the Accounts: the future is as important as the present

“We must act today because the cost of doing so tomorrow will be greater than it is now, and the scale of the issue we will face will have increased.” This is the view of Professor Richard Murphy FCA.

I believe accountancy is an outward-looking profession,” says Murphy. “I believe it is a profession about communication. I believe it tries to tell people something that they need to know about the organisations they are engaging with. It is much more than a purely financial activity.

Murphy’s credentials are lengthy (listed below). But essentially, he is a practitioner, tax campaigner and holds multiple professorships. And he is evangelical about addressing climate issues on the balance sheet.

“I have been campaigning about how accounting is made relevant to the needs of civil society – and about moving beyond the idea that the sole stakeholder of accounting is the supplier of capital to a company – for 20 years now, but also earlier in my role as a practitioner,” Murphy says.

I’ve always been convinced that there are multiple stakeholders of accounts. The IFRS only recognises shareholders. I recognise suppliers of all capital to companies, the trading partners of companies, the employees of companies, the regulators of companies, tax authorities, and civil society in all its forms…which can include local authorities.

He points out that, fundamentally, it’s people who give a company its licence to operate within the community. “I believe we have a duty to account to them,” he says. “I don’t believe accountancy has got to that point, although I think the Brydon Report on audit reform is potentially a fascinating direction of travel with regards to that duty.”

The question for Murphy now is how should accounting report to all those stakeholders about matters that are of interest to them?

“The IFRS itself is, at the moment, asking questions about what data people need on sustainability from accounting. This fuels my concern that accountancy is living in a bubble,” says Murphy. “There is financial reporting in one circle. Sustainability is in another. There is not even a circle around them both. They are not actually relating to each other.”

Commenting on the initiatives around sustainability reporting being discussed, he says the problem with them all is that none actually puts the cost of meeting climate requirements into financial reporting. “My desire is to make it central to accounting, not additional. This is at the core of what makes a going concern now,” says Murphy. “If an entity is now to be a going concern, it simply has to be sustainable.”

To integrate accountancy and sustainability reporting, Murphy came up with the idea of sustainable cost accounting. “Sustainable cost accounting addresses the notion that the future is not as important as the present,” he says. “Technically, accounting has called that discounting.”

He continues: “The entire logic of the climate crisis is the reverse of that. We must act today because the cost of doing so tomorrow will be greater than it is now, as the scale of the issue we will face will have increased.”

Murphy is working on a project that puts the cost of a company eliminating carbon from its processes on the balance sheet now. This is not about the cost of carbon but the cost of eliminating carbon.

“If a company has a carbon footprint, and all companies do, how do we reduce that carbon footprint to zero? How much does it cost the company to change its systems, to change its supply chain, to change its product mix, to achieve that goal?” he asks. “This is an exercise independent of a carbon pricing exercise. And that’s why this is important: this is a matter entirely under the control of the company and so within the scope of its own financial reporting.”

It is all about process change.

What I would ask a company to do is to estimate the cost of becoming carbon neutral. That cost of becoming carbon neutral then becomes a provision on their balance sheet. It becomes a liability,” he says. “I would also argue that there should be no off-setting allowed without a permit.

The costs need to be meaningful and assured, and the auditors will have to have to form a view on them. “There must be a costing process implicit in this system. I argue that this cost should be put on the balance sheet now. It should not be discounted. It should be in full. The company should spend in the future against that provision.”

In effect, Murphy is also arguing for an extra report to be added to the accounts. It would explain how a company has spent its budget for becoming carbon neutral, whether those costs have gone up or down, and whether a company is actually spending against this budget and turning its commitment into practice. “You will have to report against your commitment,” he insists.

It is time to walk the walk. But the upshot could be what Murphy terms “carbon insolvency”. “If you put a massive liability on the balance sheet, the company might become insolvent, but they may not cease to be a going concern. However, there will be a clear indication that they are going to need new capital to achieve this goal,” he says.

But, if a company can’t see a route to becoming carbon neutral or to raising more money, then comes the concept of carbon insolvency, which would require an orderly winding up of its affairs before net carbon neutral deadlines are reached.

The winds of change are clearly blowing, and Murphy is adamant that it is not just corporate behaviour that will have to change. Accountants will have to change too.

Richard Murphy FCA is Visiting Professor of Accounting, Sheffield University Management School, Visiting Professor of Practice in International Political Economy, City University, London, Visiting Professor, Anglia Ruskin University Global Sustainability Institute, Director, Tax Research LLP, Director, Corporate Accountability Network, and Co-Founder, The Green New Deal.

This article was first published by ICAEW. You can visit the original page here.