If previous decades were defined by financial scandals, today’s business landscape is increasingly defined by conscience. Younger investors in particular are concerned about the ways that a company treats its employees, as well as the impact that companies have on the environment.
While sustainability and social responsibility have always been a priority, since 2005, these expectations have been codified through environmental social governance (ESG) criteria. ESG criteria can help investors to put their money where their values are, so to speak, investing in companies that have a strong ethical reputation.
ESG criteria naturally overlap with the values of Certified B Corporations. In this post, we’ll explore more about the ways that B Corporations operate, how they demonstrate their value to their shareholders, and what the implications of these corporations are for forensic accounting.
What is a B Corporation?
An organization must be certified by B Lab in order to qualify as a B Corporation. B Lab evaluates its applicants based on how they integrate ESG factors into their overall business model. B Lab looks at how companies treat their employees, the local community, and the environment.
B Lab certified its first generation of B Corporations in 2007, though these companies can now be found around the world. Today, most B Corporations tend to be privately-owned small and mid-sized businesses, but there’s no reason that larger corporations can’t receive certification by incorporating ESG criteria into their governing documents, as well.
What is the Value of a B Corporation?
A B Corporation is radically different from a shareholder-centered operation, which usually operates based on the “bottom line” of financial performance. As more than a few publications have noted, B Corporations are known for putting purpose over profit, operating out of concern for more than just dollars and cents.
As we mentioned above, this emphasis on corporate responsibility has attracted younger investors who care as much about a company’s ethics as their stock performance. But identifying as a B Corporation also helps an organization to stand out from the rest, drawing in new investors.
B Corporation Certification
Controllers need to be aware of the specific criteria that B Labs uses to certify a B Corporation. Likewise, adherence to ESG criteria needs to be backed up with clear documentation, which is where an accountant can be extraordinarily valuable.
Financial controllers may be asked to complete B Lab’s B Impact Assessment (BIA). This is a free questionnaire used to establish the overall social and environmental impact of a company. There are around 200 questions in total.
While most of these questions are aimed at determining a company’s positive social impact, there is also a Disclosure Questionnaire that requires a high level of corporate transparency. This questionnaire invites the applying company to disclose any specific practices, fines, or sanctions that are relevant to the company.
This Disclosure Questionnaire won’t necessarily disqualify a company from certification, but B Lab may have follow-up questions or recommendations for rectifying past issues and more fully integrating ESG criteria in the future. In some cases, however, companies that fail to meet B Lab’s standards may be denied certification.
The larger point is that B Corp certification demands clear, honest answers to questions, and this level of detail demands the accuracy of an experienced accountant.
B Corporations and Forensic Accounting
Of course, some companies may be so desperate to improve their image that they may commit fraud to obtain certification as a B Corporation. Forensic accounting practices, however, can be vital in verifying a company’s compliance with ESG criteria.
For example, forensic accounting practices can be used to investigate breaches of contract or violations of employee rights, which would obviously impact the social standing of a corporation.
Similarly, forensic accounting methods can ferret out ways in which companies have cut corners with things like waste disposal or environmental emissions, which would violate the company’s claim to support environmental sustainability.
Forensic accounting has a variety of other applications, as well, and a seasoned accountant can uncover money laundering, embezzlement, theft, and a host of other “white collar” crimes that would jeopardize the ethical reputation of any company.
Controllers should therefore be aware that while it isn’t overly difficult to become a B Corporation, they may wish to verify that their company’s stated ESG goals align with the reality reflected in their books.
Learn more in What Controllers Need to Know About Forensic Accounting.
B Corporations and the Future of Business
B Corporations are still relatively new, so their long-term impact is not presently clear. What is clear, however, is that companies will increasingly feel the financial and social pressure to adhere to ethical standards.
For this reason, ESG criteria—or at least some variation of them—are likely here to stay. This will naturally open up new doors for forensic accountants, who may be called upon to ensure full compliance with ethical and environmental standards.
In the end, rising generations of investors can have increased confidence that their investments are helping to make the world a better place.
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