Part 1: The need to measure and report, with considerations for the assurance professional
Auditors may be asked to complete assurance engagements on non-financial information, and this is increasingly likely to include the review of management reports on social, environmental and sustainability information. When management provides this type of information it is known as Extended External Reporting (EER), which is a requirement for listed and larger private companies in some jurisdictions. In addition, many companies wish to provide additional information on the environmental impact of their operations on the environment.
There are challenges in undertaking such engagements, and although this can be a highly specialist area, there are still steps that the assurance provider can take to mitigate these issues.
This article considers the main reasons why companies produce these reports and the various methods of measurement used. Auditors may be asked to review the information as part of their review of the annual report, or as a separate assurance engagement.
This is the first of two articles which considers why sustainability information is published and a brief coverage of the measurement issues. An assurance professional is most likely to review sustainability information as part of the strategic report, which is covered briefly here. Increasingly though, assurance professionals are being tasked in reviewing specific sustainability reports, this is covered in the second article on the topic.
Companies can choose to include this type of information within their annual report or to produce stand-alone reports on social, environmental and sustainability matters. In the last decade, Integrated Reporting <IR> has become common, which aims to provide a holistic view of the company’s financial and non-financial performance and its potential for long term value creation.
The measurement of specialised information can be problematic, because sustainability or environmental indicators may be reported in different ways even within the same industry and several differing reporting standards may be used, rather than a single, global reporting basis.
In 2022, the International Sustainability Standards Board (ISSB) commenced a consultation on two proposed sustainability standards, one regarding general sustainability related disclosures and one regarding climate related disclosures. There are a variety of different Key Performance Indicators (KPIs) and metrics in use, and comparison between companies and industries is challenging for the following reasons:
The United Nations (UN) adopted a series of sustainable development goals (SDG) in 2015 and there are over 200 KPIs as published by the OECD in 2021. Therefore, there is a wide range of KPIs (‘sustainability indicators’) and targets which may be adopted by businesses, and these can vary by region, by industry and by individual company.
Assurance providers are faced with understanding what is being reported upon and why (legislative or commercial reasons), as well how the information is being obtained, collated and presented.
The reporting of these benchmarks may be presented in different ways, for example, one company may produce a table of financial information to report on subject matter, whereas another may choose to report using non-financial or narrative disclosures. Comparison between companies, even within the same industry, is problematic due to the lack of consistency in selecting which measures to disclose, how the information is presented and how metrics are quantified.
Examples of reporting benchmarks include:
As with any assurance engagement, the auditor should consider the impact of risks on the planning and performance of the engagement. When faced with planning an assurance engagement of non-financial criteria, such as those relating to the environment or sustainability, the fundamentals of existing auditing and assurance standards may be used as a basis for the engagement team.
Sustainability information may be supplied in the annual report alongside the financial statements. It is worth bearing in mind that there is an expectation gap risk occurring, as some users expect that all information in an annual report is subject to a detailed assurance process by the auditor (beyond what is expected of ISA 720 (Revised) The Auditor’s Responsibilities Relating to Other Information). Where such information is to be presented, it is vital for the assurance provider to clearly state in their letter of engagement, as well as in their auditor’s report on the financial statements, the limitations of their assurance work.
Guidance on the review of non-financial information as part of the annual report is covered by ISA 720 (Revised). Auditors need to consider whether there is a material inconsistency between the other information and the financial statements.
Auditors should consider all auditing standards, but a few key ones which may be relevant to the review of other information are:
This list is not exhaustive and other auditing standards may need to be considered in order to obtain the relevant sufficient evidence in an engagement.
The second article in this series considers the challenges of auditing sustainability information in more detail, as well as some tips on exam technique for your Advanced Audit and Assurance exam.
It is also recommended to review an annual report from a large, listed company and review the sustainability report and the auditor’s report.
Written by a member of the AAA examining team