Adding ESG to Accounting Classes Spurs Students to Get Invested

Ask the dean of nearly any business school and you’ll hear a common lament about accounting: Enrollments are down. The reasons range from increasingly uncompetitive salaries paid by the largest accounting firms for entry-level jobs to changing student tastes for the subject.

There’s not much an individual faculty member can do about the former. But with respect to the latter, we faculty can try to meet students where they are—and where they’re going.

Pivoting accounting degree programs to focus more on data analytics is one approach, and we’re seeing more schools introduce such programs. But even within these programs, students still must learn some core accounting principles. Using environmental, social, and governance-related measures as something of a hook is one increasingly popular strategy to get them interested.

I’ve used this in my own courses to some extent. Learning the basic principles behind accounting—the why, not just the what—can equip us to deal with a much broader range of scenarios we encounter in the real world, whether they’re in the context of understanding a public company’s financial statements or something completely different. Starting with the “completely different” can sometimes get students to appreciate the applications to more traditional accounting topics.

Here’s an example I’ve used in my own instruction when trying to teach students about how to identify suspicious patterns in reported earnings figures and how companies might use flexibility in accounting rules to generate those numbers. Since 2017, the UK has required large employers—those with over 250 employees—to report multiple statistics on their gender pay gaps.

There’s an obvious “socially desirable” benchmark that firms have an incentive to report: zero, which implies that the median male and female employee are paid the same wage. I then show students the actual underlying gender pay gap data. Relative to small positive or negative numbers, a disproportionate share of firms claim to have a precisely zero pay gap.

When examining the data in a bit more detail, we can see that most of these zeros are mathematically inconsistent with other data that those same firms report, and are likely to be misreported.

This example leads to follow-up questions. Why do firms do this? What are the downsides to misreporting gender pay gaps, and why do so many firms do this despite the obvious costs of fudging the numbers? How might firms take advantage of the flexibility in reporting rules to report better gender pay gaps in ways that aren’t so easily identifiable?

We discuss the pros and cons of allowing flexibility and discretion when it comes to calculating figures. Discretion allows firms to better communicate nuances of their own situation in a reasonable way, but it also allows for the presentation of strategic numbers. The discussion on flexibility and reporting discretion, while conducted within the context of gender pay gaps, touches on points that apply more generally.

How does this discussion motivate an interest in intermediate financial accounting and enable me to teach something such as revenue recognition? For one, firms and their managers face similar incentives to engage in benchmark-beating—e.g., wanting to hit the analyst consensus earnings forecast.

The benefits are similar to the gender pay gap setting. Benchmark-beating presents a way to positively shape outside stakeholders’ perception. Accounting rules also allow enough discretion for managers to be able to do this. The conceptual pros and cons of allowing discretion and flexibility carry over from the non-accounting setting.

Once we’ve talked about why we allow for discretion, it is then easier to talk about how this gets implemented in practice—through choices made in revenue recognition. What is a standalone selling price, for example, and how might companies strategically choose these to boost reported revenue for a certain segment or to pull revenue forward in a bundled transaction?

There are probably plenty of other examples to come up with. And I’m sure that many of my colleagues in the profession have used similar examples in their own classrooms.

The broader point, and something we often struggle to convey to students, is that accounting isn’t just a set of inflexible rules that can be fed to a computer. It involves a lot of judgments in the quest to convey as best as possible a firm’s underlying economic performance.

Whether you intend to be a producer of financial statements (an accountant or a chief financial office) or simply a consumer (an investor), it’s important to understand how judgment, discretion, and strategic reporting incentives shape the numbers we ultimately see.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aneesh Raghunandan is assistant professor of accounting at the Yale School of Management, with focus on financial accounting, corporate sustainability, and their intersection.

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