Industry Trends

Auditing All the ESG Things

Caleb Newquist Editor-at-Large, Gusto 
toxic workplaces

March 10, 2022

Want more On the Margins? Check out the archive.

Programming notes

First, I didn’t warn you about there being no On the Margins last week. Sorry about that. It won’t happen again.

Second, this newsletter will be sent every other week over the next few months while I cover for a colleague on family leave. Yes, I will sacrifice this newsletter so people can take family leave however long they wish to take it. (The evidence for supporting family leave is pretty clear.) You’ll just have to carry on with 50% fewer quips and non-sequiturs about the world of accounting temporarily. It will be fine. 

And now, the newsletter.

ESG auditing

Auditing, as we’ve discussed, isn’t an easy gig. It’s largely thankless work and requires extreme fortitude, plus a peculiar love of rules. The ideal auditor is someone who knows those rules, knows when they’re followed, and calls out when they’re not. That means not worrying about being liked. To a degree, this explains why most auditors aren’t good at auditing. Too many of them want to be liked, and it’s part of the reason I’ve argued for audit-only firms, and that most firms get out of the business. 

I don’t expect many firms to take that advice. After all, there are a lot of interesting things happening in the audit world; blockchain and such. But also, environmental, social, and governance (ESG) issues have emerged as an important group of business considerations. And the more seriously businesses take ESG issues, the more that stakeholders will demand accountability—and in the business world, historically, that has meant… auditing.  

Anyway, here’s a recent example:

Apple Inc. shareholders approved outside proposals recommending audits of the company’s civil-rights impact and a public report on its use of concealment clauses in employment agreements, marking a rare instance of investors defying the tech giant.  

​​The votes were part of Apple’s annual shareholder meeting, held virtually on Friday for the second year in a row. Investors also reelected the company’s board and approved its executive compensation plan.

The proposal on civil-rights audits is part of a broader push to get corporations to track if, and how, they contribute to racial inequities. Shareholders at major U.S. companies, including Tyson Foods Inc., Citigroup Inc. and BlackRock Inc., have approved similar measures.

Maybe you’ve heard of civil-rights impact audits; Facebook had one done; Airbnb’s first was in 2016. It’s a pretty new idea, so there’s no telling how many companies will actually proactively pursue it, but it’s illustrative of the possibilities.

“But Caleb,” you’re saying, “these are huge companies. Why should I—or my clients—care about this?”   

Good question! I guess you don’t have to. The needs of smaller businesses are less complex. But here! It’s even in the Journal of Accountancy:

Environmental, social, and governance (ESG) issues are coming to the forefront for financial statement preparers and auditors with the formation of an International Sustainability Standards Board and the SEC’s work to prepare a climate risk disclosure rule.

Preparers and auditors in the United States need to stay on top of these issues. Risks and opportunities related to climate, human capital, and other ESG-related factors are required to be considered by preparers and auditors when they affect the business and operating environment and have a material effect on the financial statements.

Maybe it’s just me, but the impact on financial statements is only one pretty narrow way to look at this. If ESG issues of all kinds are becoming more important, and it’s becoming more important to account for them, then the demand for accountability will likely follow. In other words, ACCOUNTING FOR ALL THE THINGS will lead to AUDITING ALL THE THINGS.

So even if audit firms don’t know anything about carbon emissions or civil-rights impact, they certainly know auditing. They have decades of legacy knowledge about how to plan, staff, document, draw conclusions, make recommendations, et cetera. Not everything would translate perfectly from financial statement auditing to ESG auditing, but it’s got to be better than starting from scratch.

I was an auditor for a little while, so maybe I have a bias, but I don’t want to imagine trying to start an ESG auditing firm without any actual auditors. In contrast, an audit-only firm getting into ESG auditing could be very interesting.    

COVID relief fraud

We’ve covered a fair amount of COVID relief fraud in this newsletter, and it’s mostly been your run-of-the-mill brazen scams where people just filled out the paperwork with the first thing that came to mind. Here’s a made-up example that I feel isn’t far off:

Name: The Hamburglar 

Business Name: I Can Stealz Cheezburgers 

Gross Revenue: Eleventy millions

Number of Employees: Whoever

Judging by what I’ve seen, this applicant would’ve received a PPP loan for $530,000 and immediately spent it on an Italian sports car, Yeezys, and maybe a trip or two on NetJets. 

Unfortunately for these perps, most are caught in relatively short order and get slapped with stiff prison sentences. Easy come, easy go. But when there’s basically free money floating around, people start making bizarre choices.

Here’s another, starring Vinath Oudomsine, 31, of Dublin, Georgia.:

[S]tarting on or around July 2020, Oudomsine applied to the Small Business Administration (SBA) for an Economic Injury Disaster Loan (EIDL) ostensibly for an “entertainment services” business in Dublin that Oudomsine claimed had 10 employees and gross revenues of $235,000 in the 12 months preceding the COVID-19 pandemic. As a result of fraudulent representations on Oudomsine’s application, the SBA deposited $85,000 into Oudomsine’s bank account on Aug. 4, 2020. Oudomsine later used $57,789 of the funds to purchase a Pokémon trading card. Oudomsine agreed to forfeit the Pokémon card – “Charizard” – as part of the prosecution.

It will come as no surprise that there was no entertainment services business, no employees, no revenue. Mr. Oudomsine received a 36-month prison sentence. Adding insult to injury, there’s this guy:

Charlie Hurlocker, a Pokémon card expert and dealer, said that even if the card’s purchase had been legitimate, it was an ill-advised one on Mr. Oudomsine’s part.

“He was buying at the peak of the market,” Mr. Hurlocker said on Tuesday. “It was a terrible short-term purchase. Nobody was willing to pay more than him.”

Maybe his plan was to burn the Charizard and sell an NFT? Guess we’ll never know. Still. At this point, I think we’ve exhausted all the ludicrous outcomes for spending illicit pandemic relief money. I’m excited to be proven wrong, though. 

Fresh from Gusto

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Caleb Newquist
Caleb Newquist Caleb is Editor-at-Large at Gusto. In 2009, he became the founding editor of Going Concern, the one-of-a-kind voice on the accounting profession, serving in the role for 9 years. Prior to Going Concern, Caleb worked as a CPA for nearly 6 years in New York and Denver. He lives in Denver with his wife, two daughters, and two cats.
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