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Financial Reporting and the Law

Two private sector organizations will likely have a greater impact on disclosures by public companies now that they have entered into a Memorandum of Understanding. The Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) announced the execution of the memorandum—which outlines the basis for their ongoing cooperation—in January 2014. SASB is a nonprofit organization created in July 2011 to develop sustainability accounting standards for use by public companies in disclosing material sustainability matters in SEC filings. IIRC is a global coalition of various stakeholders focused on integrated reporting. The two organizations have said they will strive for “complementarity and compatibility in the ongoing development of their respective frameworks, guidelines and standards.” The cooperation of SASB and IIRC may increase the likelihood that their efforts will influence the nature of disclosures regarded as “best practices.”

In December 2013, IIRC released the International Integrated Reporting Framework to provide principles-based guidance for integrated reporting. According to IIRC, integrated reporting “is a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term.” Businesses from all over the world—including the United States—have joined the IIRC Pilot Programme Business Network, have contributed to the development of the framework, and will test the framework during their reporting cycle.

According to SASB founder and executive director Dr. Jean Rogers, “SASB’s standards are a practical implementation of Integrated Reporting in the context of U.S. capital markets.” Over the next two years, SASB intends to issue sustainability accounting standards for 10 industry sectors. The standards are intended for use by companies in making disclosure in their 10-Ks, primarily in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section. SASB has listed the sectors and the status of their release of standards for each. It has also provided a mock-up of a Form 10-K of a biotechnology company that incorporates disclosure based on the SASB standard for biotechnology. Among the board members of SASB are former SEC chair Elisse Walter, who was appointed effective January 2014, and Aulana Peters, who was an SEC commissioner from 1984 to 1988.