Called To Account

By Thomas K. Grose/London

Alaska's oil fields at Prudhoe Bay lie beneath an area of awesome beauty, still pristine and fragile. But around 750 miles to the south lies Prince William Sound, the site of one of the world's worst oil-spill disasters a decade ago when the tanker Exxon Valdez ran aground and dumped 11 million gallons of syrupy crude, creating a 500-mi.-long oil slick. Since BP Amoco is the largest oil producer in the region, it's not surprising that environmental activists closely monitor its oil-exploration operations there. Last year Paul Wenman spent several weeks trudging around the Alaskan tundra to see just how well the firm had implemented its stated environmental and social aims. But Wenman doesn't work for Greenpeace. He was there at the oil company's expense, as the head of accounting firm Ernst & Young's environmental-services group, conducting an audit no mere accountant could accomplish.

BP Amoco is one of a growing number of U.S. and European companies that have begun issuing annual reports that describe not only their financial performance but also details about their environmental and social or ethical behavior. This so-called triple-bottom-line exercise in corporate citizenship is based on the belief that companies owe stakeholders--customers, employees, activist groups, the public--an annual warts-and-all airing of their environmental and societal records, just like the flow of financial data they must provide to shareholders. But since environmental or ethical misdeeds can lead to profit-hammering headlines, the extra information can be of use to investors.

Many companies issue environmental- and social-responsibility reports, but those risk appearing to be little more than thinly veiled public relations ploys. For this type of corporate transparency to be of real value, it's essential that the information be thoroughly vetted and verified by independent agents. Increasingly, companies are turning to the Big Five accounting firms that certify their financial books. The auditing of environmental and social reports--and related consulting services--is opening up a whole new area of business for accounting firms, but it does not come headache free. "It's not straightforward financial numbers crunching," explains Glen Peters, a partner at PricewaterhouseCoopers in London.

Among other things, it means accounting firms need to hire people who may not know a debenture from a dividend, but who do understand carbon-dioxide emissions or child-labor scams. Thus, when the London office of KPMG recently formed its new Sustainability Advisory Services (SAS), it hired the core personnel en masse from the Body Shop, the British cosmetics firm that helped pioneer the practice of corporate social and environmental accountability.

This new breed of auditor must be ready to tackle a wide range of topics. Are oil companies on schedule for cutting emissions of greenhouse gases, for example, or eliminating the disposal of natural gas by flaring? Do companies operating in countries where the ancient practice of baksheesh remains an accepted business method adhere to a zero-tolerance of bribery? Do manufacturers or retailers that receive supplies and goods from developing countries guard against child and slave labor? Are companies achieving goals aimed at employing more women and minorities?

A major problem is how to quantify information of this nature. When auditors go over a company's books, they can follow accepted U.S. or European accounting principles. But there are no similar guidelines to follow when it comes to measuring or defining environmental issues or ethical concerns.

Instead, accounting firms tend to rely on methods they know best. When KPMG and PricewaterhouseCoopers signed off on Royal Dutch/Shell's recent societal-accountability report, they wrote that in the absence of standards, "we conducted our verification exercise in accordance with international standards for financial auditing and reporting suitably adapted." Old-fashioned investigative spadework is useful too. Ernst & Young's Wenman says that means ensuring that the actions of a company--or its contractors and suppliers--in the field measure up to principles adopted in its boardroom.

Auditing firms verify findings, but they don't interpret them--that's left to the public and activist groups. But what's acceptable? Shell reports that it voluntarily discharged just over 6,600 tons of oil into surface water in 1997, down from nearly 13,000 tons the year before. Is that an impressive improvement? Or is 6,600 tons still too much? Is there a permissible discharge level? And where did the discharges take place? What about emissions of greenhouse gases? Oil companies may brag about meeting tough targets on cutting emissions of carbon dioxide. But some advocacy groups say those targets shouldn't be accepted as goals because the ultimate goal should be an end to fossil-fuel use.

Public-interest groups like the Coalition for Environmentally Responsible Economies (CERES), based in Boston, are scrambling to issue guidelines and standards. CERES, a coalition of more than 50 investor, environmental, religious, labor and social-justice groups, has launched a global-reporting initiative to set environmental benchmarks for corporate reports. London's Institute of Social and Ethical Account Ability, a lobbying group, has established recommendations for standards for social and ethical reporting and developed accreditation procedures for professionals in this area.

Any group attempting to write a widely accepted set of standards faces a rough task. Standards must be rigorous enough to satisfy pressure groups, yet realistic enough for corporations to find them affordable and achievable. Moreover, the canons are proliferating, and will soon begin to clash with one another. The European Federation of Accountants and Auditors in Brussels, for example, is drafting a set of environmental standards that are likely to differ from those of CERES. "We need a unified, comparable system, because it's not helpful if there are 25 different standards" in competition with one another, says Sir Geoffrey Chandler, head of the business-practices observance group of Amnesty International U.K.

Even if standards were universally acceptable, many activists would continue to be skeptical of the role accounting firms currently play in the auditing of nonfinancial reports. "I am not sure that they understand the issues sufficiently to do this work," warns Tony Juniper, policy director of the environmental activist group Friends of the Earth. Yet he concedes there are no other real alternatives, and that accounting firms at least offer unbiased, professional methods. Juniper thinks it would help if there were an international body to accredit this new type of auditor.

Some advocacy groups insist that they should audit corporate social and ethical reports. But PricewaterhouseCoopers' Peters argues in his book, Waltzing with the Raptors, that activists "have far too much invested in the issues to offer real objectivity." And in any case such oversight can backfire. Former Atlanta Mayor and veteran civil rights leader Andrew Young found just how difficult verification can be when he took on the task for sports-footwear giant Nike in 1997. After Young said he didn't find sweatshop conditions in Nike's Asian plants, human-rights groups attacked him for "greenwashing" Nike's record. Juniper warns that corporations that do not truly embrace the need for change should not think they can use advocacy groups to give themselves a veneer of credibility.

Some companies do, however, find it useful for activist groups to review and comment on their reports. Sometimes activists get involved even earlier and help companies develop reporting procedures. Shell used the advice of environmental consultancy SustainAbility in creating its societal report. Friends of the Earth is willing to provide such services, even when it doesn't see eye to eye with a company.

Triple-bottom-line reporting may have opened up an entirely new line of business for big accounting firms, but Amnesty's Chandler believes that they are not fully exploiting the opportunities: "The accounting firms have been extraordinarily slow on the uptake of this." Accountants are, after all, renowned for their caution. But as demand for these services grows, the commercial possibilities should prove highly alluring to accounting firms, however conservative their instincts. KPMG, for instance, expects that its SAS unit in London will earn $32.4 million over the next three years. And as accountants can appreciate better than most, new revenue streams are usually worth wading into--even if it also means slogging through dense rainforests or sliding across Alaskan snowfields.