sustainability briefing paper 3
AssurAnce
in partnersHip WitH
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AccountAnts And sustAinAbility AssurAnce
Accountants have a crucial role to play in ensuring that sustainability assurance enables users of their statements to gain confidence in reported information and make better, informed decisions.
assurance is needed to convince stakeholders that information provided by an organisation is credible, reliable and relevant. accountants, through their professional scepticism, rigorous approach and technical skills, have a crucial role to play in ensuring that sustainability assurance enables users of their statements to gain confidence in reported information and make better, informed decisions. it is increasingly accepted that today’s financial reporting and audit is failing to provide information on many of the drivers that create business value. this is in part because many business drivers are ultimately non-financial, such as customer service and climate change. as non-financial issues become increasingly important for strategic decision making and organisational evaluation, the need for assurance on full corporate disclosures relating to sustainability, as well as assurance relating to performance on particular issues, will increase. accountants must recognise that traditional assurance
structures and practices are increasingly being challenged by non-financial issues, and that new models of non-financial assurance present the industry with both opportunities and challenges. Central to many of these new models of assurance is a greater consideration of stakeholders’ interests and concerns.
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the current systems of reporting and auditing company information will need to change – towards the public release of more non-financial information…customised to the user, and accessed far more frequently than is currently done. it is time, therefore, for all global capital markets stakeholders involved to launch a process that will lead to the development of a new business reporting model
Serving Global Capital Markets and the Global Economy: A View from the CEOs of the International Audit Networks november, 2006
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AssurAnce of sustAinAbility reporting
sustainability (report) assurance has grown over the past decade and although it remains a relatively niche market, it is a rapidly growing area of interest to accountants.
non-financial reporting has grown with the recognition that an understanding of nonfinancial issues is crucial to understanding what really contributes to value creation. However, as with annual accounts, effective non-financial reporting needs more than good metrics and standardised reporting formats. What it takes is the credible and accurate communication of what is material to stakeholders, in ways that enable them to base decisions and actions on the most appropriate information, provided in a timely manner. it is now accepted that nonfinancial issues can be material. therefore, the need to assure that they are presented properly is growing.
there are indications that there will be strong growth in asia in coming years as it has become the second largest region for assurance, and further growth is predicted. in contrast, in north america where reporting is well established, reporters are far less likely to include external assurance. unlike in financial audit, accountants do not have a monopoly on providing sustainability assurance and in many markets were not the first movers. Certification companies and boutique providers have a significant share in some markets. Despite this, accountants now have a significant and growing share of the global sustainability reporting assurance market. the current estimate of the accounting companies’ global market share is 40%, rising to 56% for the global 500 largest companies, according to Corporateregister.com. Many leading accounting practices are investing in this area as they acknowledge the future impact it will have on their work. non-financial assurance is not just about dealing with different issues, but also about addressing new audiences and embracing new techniques and processes. sustainability assurance has grown over the past decade and although it remains a relatively niche market, it is a rapidly growing area of interest to accountants. in 1998 just over 100 reports had sustainability assurance but according to Corporateregister.com’s 2008 publication Assure View, almost 800 did in 2007 – representing approximately 25% of all sustainability reports. KpMg’s 2008 corporate responsibility survey indicates that formal assurance is now present in 40% of g250 reports.
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independent assurance provides evidence to report users that: the right things are in the report – that all major issues relevant to stakeholders are included the things in the report are right – that data is reliable and claims are not exaggerated”
Chris tuppen, chief sustainability officer – bt
although the global trend is increasing, the use of external assurance for sustainability/ Csr reports varies significantly across regions. this is largely due to the different stages of maturity in sustainability reporting and assurance. the practice was developed in europe and this region has the most mature sustainability reporting, and as a consequence, a strong presence in the assurance market.
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AssurAnce on specific elements of performAnce informAtion
Assurance can also be obtained on specific single issues as well as entire reports. these issues include auditing labour standards, health and safety data, water use and in particular, greenhouse gas emissions.
assurance is often seen as part of the corporate level reporting cycle, where the full range of issues are considered, but assurance can also be obtained on specific single issues. these issues include auditing labour standards, health and safety data and water use. greenhouse gas (gHg) emissions are a particular growth area for non-financial assurance, and this presents the accounting industry with an enormous opportunity. there are an increasing number of mandatory and voluntary gHg reporting and trading schemes. all of these schemes depend on reliable and accurate emissions disclosure for their effectiveness. there are a host of different types of gHg disclosures that can require assurance, from the inventory of carbon emissions to the extent of carbon offsets and clean development mechanisms, and even the financial impact of carbon trading schemes. there is still no generally agreed framework for this, but as carbon reduction schemes become more common the need for audit and assurance will increase.
in addition to the two cases highlighted, there are numerous other gHg reporting and trading schemes globally, often with different assurance needs. these include the Dutch nOX emissions trading scheme (ets), the California Climate action registry in California, the Ontario nOX and sO2 program, JV ets in Japan and the new Zealand ets. there is also an evolving framework of standards specifically developed for gHg verification, notably isO 14064-3:2006 which provides guidance for those conducting or managing the validation and/or verification of gHg assertions. the ifaC carbon accounting standard is the forthcoming assurance standard on assuring carbon emissions information, being developed by iaasb, as there is currently no accounting standard for carbon emissions. this will probably look at emissions information in the form of an organisation’s ‘carbon inventory’. it will also include guidance on assurance of carbon offsets and is likely to be of assistance to financial statement auditors addressing the value of emission trading rights.
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uK carbon reduction commitment scheme
the uK Carbon reduction Commitment (CrC) scheme is a mandatory emissions trading scheme due to begin in 2010. it will be compulsory for large commercial and public sector organisations using more than 6,000 MWh/year of half-hourly metered electricity. emissions will need to be measured and reported annually and proper data management systems and accurate carbon assessments will be critical to CrC compliance, as there will be penalties for inaccurate reporting of emissions. the scheme will be enforced through self-certification of emissions, backed up by an independent risk-based audit regime of around 20% of organisations. However, in reality there may well be numerous organisations looking to third party assurance to give them greater credibility of their reporting.
Australian national greenhouse and energy reporting scheme
the australian national greenhouse and energy reporting scheme applies to facilities producing more than 25 kt CO2 equivalent per annum or aggregate emissions of more than 125 kt CO2 equivalents. Companies must provide a report covering the greenhouse gas emissions, energy production, and energy consumption from the operation of facilities during a financial year. if the policing authority, the greenhouse and energy data officer, has reasonable grounds to suspect an issue of non-compliance, the company may be required to appoint an external auditor to ensure compliance with the act and regulations, in addition to possible fines.
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ApproAches to sustAinAbility AssurAnce
While verifying that information in a sustainability report is accurate is crucial for stakeholders to be able to use the information presented, it is not the only issue for those interested in sustainability assurance.
at present there are two key global standards for sustainability assurance: isae 3000 and aa1000as (2008). isae 3000 is the standard most widely used by accountants. it has been adopted in some jurisdictions as a national standard and many firms with transnational audits have agreed to apply it directly on a global basis. aa1000as is a multi-stakeholder standard for use beyond the accountancy profession. Many accountants are using the two together and these examples are often seen as best practice (see page 7). While verifying that information in a sustainability report is accurate is crucial for stakeholders to be able to use the information presented, it is not the only issue for those interested in sustainability assurance. the material sustainability issues vary significantly by entity, and so sustainability assurance should therefore also look at whether it is reporting on the right issues. assurance which goes beyond simple verification is increasingly recognised as value adding. the increased use of aa1000as which is now being referenced in 36% of assurance statements (up from 10%) among the 100 biggest companies in each market considered by the KpMg Corporate responsibility survey 2008, is further evidence of the testament to these drivers. in addition to isae 3000 and aa1000as there are several other national assurance standards and guidelines, the table on the right gives an introduction to some of these.
Country netherlands
Assurance Standard/Guidance royal niVra COs 3410n
Description this standard is based on isae 3000, but is focused more specifically on assurance of sustainability reporting. it states that the objective of an assurance engagement relating to a sustainability report is an examination of the information in the report to determine whether it meets the relevant reporting criteria. the perspective of the intended users of a sustainability report is central to assurance engagements according to the Dutch standard. there is also a standard on the use of experts and the two standards should be used together. the iDW assurance standard provides guidelines for the acceptance and performance of engagements to audit or review sustainability reports, for reporting on such engagements and for the composition of the assurance report consistent with the professional responsibility. this is used by accounting firms providing sustainability assurance for swedish companies. it was the first national standard in the world when it was issued in 2004. the standard was updated in 2006 to comply with isae 3000. During 2007 far srs started a new project to develop a standard to provide a positive statement on sustainability reports (“reasonable assurance”). pratique professionnelle relative au rapport du Commissaire aux Comptes sur certaines données ou informations environnementales et sociales ou sur les procédures d’établissement de ces données ou informations, contenus dans le rapport rendant compte en matière de développement durable.
(the text of this guidance only exists in french. this is seen as informal guidance only)
germany
generally accepted assurance principles for the audit or review of reports on sustainability issues (iDW ass 821) far srs standard revr 6 “independent assurance of voluntary separate sustainability reports”
sweden
france
guidance
italy
CnDC asseverazione e report di sostenibilità” (sustainability report assurance)
Developed in 2006 and includes general principles for carrying out external assurance on a sustainability report.
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isAe 3000
AA1000As
the majority of the iaasb standards are for audits and reviews of historical financial information, however, it also produced isae 3000 (international standard on assurance engagements 3000) in 2004 as a standard for non-financial assurance engagements. it is a generic standard that outlines basic procedures for an accountant to follow. it may therefore be used to support non-financial assurance engagements of many kinds. it is used by many accountants as a basis for assurance on Csr/sustainability reports. the isae 3000 has comprehensive procedures for evidence gathering processes, assurer independence issues and other areas. it requires the level of assurance to be stated based on the risk of the engagement. a ‘limited’ level assurance engagement conclusion must be stated in negative language whereas a ‘reasonable’ level assurance engagement must be stated positively. Whilst this language is accepted by traditional users of corporate information, some stakeholders find the use of negative language confusing. a limited assurance process must be at least sufficient for the practitioner to obtain a meaningful level of assurance as the basis for a negative form of expression. isae 3000 sets out in detail the characteristics of criteria for them to be suitable for assurance. assurance criteria exhibit the following characteristics: 1. relevance: relevant criteria contribute to conclusions that assist decision-making by the intended users. 2. Completeness: criteria are sufficiently complete when relevant factors that could affect the conclusions in the context of the engagement circumstances are not omitted. Complete criteria include, where relevant, benchmarks for presentation and disclosure. 3. reliability: reliable criteria allow reasonably consistent evaluation or measurement of the subject matter including, where relevant, presentation and disclosure, when used in similar circumstances by similarly qualified practitioners. 4. neutrality: neutral criteria contribute to conclusions that are free from bias. 5. understandability: easy to understand criteria contribute to conclusions that are clear, comprehensive, and not subject to significantly different interpretations.
the aa1000 assurance standard is a principles-based standard that provides an approach specifically aimed at full sustainability assurance. it addresses the underlying management and reporting systems and processes as well as the reported information. aa1000as (2008) provides a methodology for assurance providers to evaluate and provide conclusions on: - type 1 - the nature and extent of adherence to the aa1000 accountability principles - type 2 – the nature and extent of adherence to the aa1000 accountability principles and the quality of the information publicly disclosed on sustainability performance. the accountability principles are: inclusivity (foundation principle): for an organisation that accepts its accountability to those on whom it has an impact and who have an impact on it, inclusivity is the participation of stakeholders in developing and achieving an accountable and strategic response to sustainability. Materiality: Materiality is determining the relevance and significance of an issue to an organisation and its stakeholders. a material issue is an issue that will influence the decisions, actions and performance of an organisation or its stakeholders. responsiveness: responsiveness is an organisation’s response to stakeholder issues that affect its sustainability performance, and is realised through decisions, actions and performance as well as communication with stakeholders.
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current trends in sustAinAbility AssurAnce
there are three emerging trends in sustainability assurance: the use of stakeholder panels, integrated assurance and corporate feedback on assurance statements.
Stakeholder panels for assurance stakeholder panels comprising an invited panel of interested parties to undertake assurance are used by some reporting organisations to enhance and in some places replace more formal assurance. such panels are a way of involving external stakeholders in the assurance process and tend to focus heavily on the ‘are the right things included?’ element of assurance rather than the verification of data. there are concerns on the role of stakeholder panels for a number of reasons, including the perceived or real lack of rigour in this process and the independence of panel members. However, a well arranged panel can augment or enhance assurance if it has the remit to question, criticise and investigate and contains members with auditing experience. Integrated Assurance a recent corporate reporting trend, particularly in europe but also in places such as brazil, is to produce integrated annual financial and sustainability reports. these reports present a wide range of sustainability issues in the same document as traditional financial and narrative disclosures. this development is seen as a way of elevating key sustainability issues into the mainstream readership of annual reports, because these issues can have a material impact on performance. the number of these reports and by consequence the number of assurance statements in these reports is still low, perhaps just 100 globally in 2007. the
majority of these integrated reports still provide two assurance statements, a traditional financial audit statement and a statement that covers the sustainability information. basf are an exception, producing a single assurance statement in 2007, which covered financial and elements of non-financial information. as the number of assurance statements and the market share of accountancy firms is significantly higher for these types of reports, the anticipated growth of this trend could mean new opportunities for accountants. Corporate feedback on assurance statements a more recent trend noted in reports published in 2008, most notably bat and Holcim, was the willingness of the reporting entity to respond to the sustainability assurance statement. in some cases this was to articulate their explanation where the assurance statement had highlighted a limitation, in others it was to respond more positively to the findings of the statement and make commitments for improving a particular aspect during the coming year. this feedback is symptomatic of the use of sustainability assurance as part of the internal learning process, as well as the external communication process. leading reporters increasingly want to be challenged by their assurance providers and responding in this way allows for reporting and assurance to be part of a transparent, continuous improvement process.
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the future of AssurAnce
it is clear from the information in this paper that standards and assurance practices are evolving. this evolution is not just in the hands of the accountancy profession because of its very nature this is becoming a multi-disciplinary process that will involve many teams with different professional skills. accountants have a big opportunity to shape the future landscape, but must be aware that to a larger degree than in financial reporting they will need to work with professionals far beyond the traditional walls of their profession. in the long term there is a need for a new blueprint that creates a reporting and assurance model which is stakeholder focused, principles based, integrated (financial and non-financial), applicable internationally, easy to understand and economically efficient for business. accountants have an enormous role to play in creating this model for the future.
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role of the AccountAnt
accountants are in a good place to lead the development of non-financial assurance; but this is, and will continue to be, hand in hand with other professions. those with a background and understanding of non-financial impacts, which can be as wide ranging as sustainability, environment management, human rights, community affairs, health and safety and carbon management, are in a position to question the choice of materiality and responsiveness by a corporate. Working together, accountants can apply their training, experience and knowledge of accepted standards in assurance to multi-disciplinary teams which would benefit from the inclusion of sustainability professionals and other stakeholders. the rigour applied during the assurance process and levels of accepted professional value (which includes integrity and transparency) brought by accountants to non-financial assurance, will support confidence levels in report audiences; particularly if sustainability reports sit outside the mainstream financial annual report of a corporate. because of the assurance-specialist knowledge of assurance and often their command of extensive international standards, the accountant is particularly well placed to contribute to the assessment of risk, based on an understanding of the client’s circumstances including related control systems. Knowledgeable assurance providers can also be of enormous use to the internal management of reporting organisations as well as to external users of their statements. in the future, accountants would be expected to articulate the differences between stakeholder panels and full assurance to clients, and in some instances these panels and formal assurance providers need to work alongside each other. accountants are well placed to link financial and non-financial assurance within their standard practices. However to fully understand the implications of providing non-financial assurance, accountants should be building their knowledge of social, environmental and sustainability issues and supporting the development of internationally accepted measurement and reporting standards. Working in partnership with professionals in this sphere will ensure that non-financial reports which are assured have been given the due care needed to provide readers with confidence that all concerns such as materiality, risk management and future proofing have been addressed and recognised quality standards met.
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references
accountability (aa1000, assurance, stakeholder panels) aCCa (reporting and assurance) iaasb (assurance, links to financial audit, carbon accounting and assurance) isO (greenhouse gas Verification) pWC (research on assurance and stakeholder panels working together) KpMg (Corporate responsibility survey 2008, Assurance) Department for environment food and rural affairs (Defra), 2007, EU Emissions Trading Scheme: Guidance on Annual Verification european Co-operation for accreditation (ea), 2006, ea-6/03 EA Guidance for Recognition of Verification Bodies under EU ETS Directive federation des experts Comptables europeens (fee), 2006, Key Issues in Sustainability Assurance: An Overview the european sustainability reporting association Corporateregister.com (Assure View, 2008 publication)
Author aCCa, accountability and KpMg Publisher aCCa uK Date May 2009
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