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Defining New Accounting — As If the Future Counts

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This is part three of a four-part series on themes explored at the 4th International Reporting 3.0 Conference. Read parts one and two.

There has been much excitement in recent years around the suggestion that “Accountants Will Save the World.” With this comes a sense, since the 2000s, that we are getting closer to effectively capturing sustainability trends in metrics that are really relevant and decision-useful. But once you start scratching the surface and dig deeper into what is suggested by the popular mood, all sorts of questions arise – for example, questions about the type of accountants involved and the reliability of the numbers we work with.

These are the type of questions explored by a new working group of the Reporting 3.0 initiative, a group that in early 2017 took on the ambitious task of defining what New Accounting could look like twenty years from now. It involves defining the parameters of a new, comprehensive discipline of accounting that encompasses financial accounting, management accounting and sustainability accounting. The 3.0 Accounting Working Group (AWG) has 22 international expert members, including professional and standard-setting bodies such as the ACCA, CIMA, IIRC and SASB; financial institutions such as Aegon and ABN-AMRO, international agencies such as the World Bank and UNCTAD, as well as accounting experts of five universities from the USA, UK, Japan, Switzerland and South Africa.

What is the purpose of accounting?

To start with, the AWG will revisit the definition and overall purpose of accounting. This includes the meaning of concepts such as wealth and value creation. Evidently, stakeholders from diverse backgrounds have very different understandings of such terminology. “Wealth and value for whom?” it may be asked. For some, these are merely statements about current or future market values. For others, it is fairness vis-à-vis different stakeholder groups that is at stake. For some, it is about non-financial value drivers and the multiple capitals that underlie financial value. Others question the positioning of financial value as the ultimate performance metric, focusing rather on the sustainability of the multiple capitals (measured in the context of their carrying capacities) to ensure sustainable value creation. Others emphasize the need for integrated value with a long-term perspective.

Revisiting core principles of financial accounting, one wonders where all of this leaves the ability of statements to deliver a “faithful representation” of the health and future direction of an enterprise. Can we rely on mainstream statements or variants thereof to give us a reliable and concise summary of what is really true and fair? While accounting, including the word “count,” will always have an inherent bias for measurement and quantitative information, financial accounting standards have always recognized that financial or quantitative information needs to be interpreted in context and complemented by relevant qualitative content. This brings us to narrative reporting, a theme also addressed by the AWG.

The 2008 global financial crisis onwards has highlighted the shortcomings of relying on assured financial data in isolation and strengthened the interest in non-financial information. This has been reflected in new guidance by standards bodies and regulators on strategic content expected to be presented in, for example, management discussion and directors’ reviews. It shows a new awareness of the complexities of risk management and business model viability in today’s world. Such awareness can also be found in the final recommendations of the Financial Stability Board Task Force on Climate-related Financial Disclosures (TCFD) published this month, including its recommended disclosure of potential impacts of climate-related risks and opportunities on an organization’s businesses, strategies and financial planning under different future scenarios.

Connecting with broader areas of business management

Once you move into the domain of planning and strategy, sooner than later you move beyond the discipline of accounting into broader corporate finance and various disciplines of business management. This is true also for management accounting, mindful of its forward-looking focus, use of non-monetary data and critical role in planning. Aware of its possible role in building a bridge between financial accounting and sustainability accounting, the management accounting profession (CIMA and AICPA) has in recent years defined a new set of core principles of management accounting, highlighting the principles of influence, relevance, trust and value.

As ambitious as the new principles of management accounting may be, there are certain things that accounting on its own will never be able to do (let alone save the planet). Any attempt to capture sustainability or multicapital trends in quantitative terms and translate these into organizational performance metrics (financial and other) will also suffer from the complications and shortcomings left by inappropriate regulations, failing to ensure appropriate market demand and price signals. What unquestionable value accounting does bring is the focus and discipline of numbers, as well as the ability to put in place standard systems for structuring, interpreting and communicating performance information for decision-making purposes.

Decision-usefulness as well as accountability and stewardship

Let me add also that the above-mentioned function of accounting is not only about the decision-usefulness of information, something to which you will find plenty of reference in the new TCFD Recommendations. This is about more than just the ability of investors to predict future cash flows. It is also about the broader accountability or stewardship of directors and management for the direction and manner in which they steer the ship. Our AWG will also weigh this key principle, defining New Accounting as a discipline that can effectively serve as a Global Positioning System for decision-makers even remotely aware of any need to save the World.


Dr C.T. van der Lugt is Senior Research Fellow with Stellenbosch University Business School in South Africa as well as Senior Associate with the Zurich-headquartered BSD Consulting. He is Coordinator of the 3.0 Accounting Working Group (AWG) and co-Lead Author… [Read more about Cornis Van Der Lugt]


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