Michael Nugent
Sustainability Reporting
An External
Audit Perspective
Michael Nugent
IFAC
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
ICAEW Survey May 2007
Institute of Chartered
Accountants in England
and Wales
Investor confidence in
audited financial
information
200 fund managers
25% manage > £ 50
billion
9 July 2006
Heading
Subheading
Bullet 1
Bullet 2
9 July 2006
Heading
Subheading
Bullet 1
Bullet 2
9 July 2006
Heading
9 July 2006
Heading
Subheading
Bullet 1
Bullet 2
9 July 2006
One interpretation
1.
Long term sustainability = biggest concern
2.
Not only financial information is used by analysts
3.
Management comment and analysis is valued
4.
Externally assured information is reliable
Therefore, if a company publishes externally
assured, non-financial information about longterm sustainability that includes management’s
views, it will be used by many analysts, and used
with confidence
9 July 2006
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
What “assurance” are we talking about:
1. Very broad?
Anything that affects stakeholders’ confidence in an
entity’s actions/impacts/products/services
E.g., for consumers: “Clearly assurance is not
something that is delivered by any one mechanism,
but something that consumers themselves construct,
often subconsciously, from the different messages
they receive about a company and its products and
the different degrees of trust they have for the
information sources”
AccountAbility “What assures consumers”
9 July 2006
What “assurance” are we talking about:
2. Related to sustainability reports?
Anything that affects stakeholders’ confidence in the
quality of an entity’s sustainability report?
“Organizations use a variety of approaches to
enhance the credibility of their reports. Organizations
may have systems of internal controls in place,
including internal audit functions, as part of their
processes for managing and reporting information.
These internal systems are important to the overall
integrity and credibility of a report”
Global Reporting Initiative 2006 Guidelines (“G3”)
9 July 2006
What “assurance” are we talking about:
3. External assurance – GRI G3
“published conclusions on the quality of the report and
the information contained within it”
“conducted by groups or individuals external to the
organization who are demonstrably competent in both
the subject matter and assurance practices”
“implemented in a manner that is systematic,
documented, evidence-based, and characterized by
defined procedures”
“assesses whether the report provides a reasonable
and balanced presentation of performance, taking into
consideration the veracity of data in a report as well as
the overall selection of content”
9 July 2006
Accounting for Good: the Global Stakeholder Report
Pleon Kohtes Klewes
GmbH –
2005 world-wide survey
Readers
Expectations/satisfaction
Corporate Social
Responsibility reports
9 July 2006
Accounting for Good: the Global Stakeholder Report
“… an ‘official’ verification statement (e.g. by a
professional accountant) in ‘non-financial’ reporting is still
a hot issue, much dependent on the credibility of the
assurors. There is now a clear majority of international
stakeholders who want CSR reports to be ‘verified by a
professional assurance or verification body’”
“Formal verification has also gained first place among the
factors contributing to credibility. Possibly, the general
crisis of the verification industry in the wake of the Enron /
Arthur Anderson scandal has been largely overcome.”
9 July 2006
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
International Federation of Accountants
155 member bodies
2.5 million professional
accountants
“to protect the public interest
by encouraging high quality
practices by the world's
accountants”
Standards for:
(External) Auditing and
Assurance
Public sector accounting
Education
Ethics
9 July 2006
International Auditing & Assurance Standards Board
18 members
Full-time chair and 7 full time technical staff
Multi-stakeholder involvement:
Non practitioner members (moving to 50%)
Consultative Advisory Group
Public Interest Oversight Board
Transparent due process:
Meetings open to the public
Official observers from regulators
Agenda papers on website
Full public exposure
Standards etc free on website
9 July 2006
IFAC Code of Ethics for Professional Accountants
International Standard on Quality Control (ISQC 1)
International Framework for Assurance Engagements
Audits and reviews of historical financial
information
Other assurance engagements
ISA 2000+
International
Standards on
Review
Engagements
ISA 100+
International
Standards on
Auditing
Sustainability
9 July 2006
ISAE 3000
International
Standard on
Assurance
Engagements
Int. Control
Corp. Gov.
Etc, etc, etc
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
Framework for Assurance Engagements
1.
2.
3.
Three party relationship
Appropriate subject
matter
Suitable criteria
Benchmark
Not just individual judgment
Report quality, not level of
performance
4.
5.
Sufficient appropriate
evidence
Written assurance
report
Reasonable assurance
Limited assurance
9 July 2006
ISAE 3000
Requirements for, e.g.:
Ethics – the Code
Quality control
Engagement acceptance
Planning
Suitability of criteria
Professional skepticism
Risk and materiality
Obtaining evidence
Using experts
Documentation
Reporting
9 July 2006
ISAE 3000 and sustainability
ISAE 3000 generic standard: “Assurance
Engagements Other Than Audit Or Review Of
Historical Financial Information)
Sustainability Experts Advisory Panel
GRI Guidelines “G3
National standards, particularly Royal NIVRA
Considering:
Sustainability-specific assurance standard
Carbon disclosure assurance standard
9 July 2006
Professional accountants as sustainability assurors
Individual/firm attributes:
Entrance hurdles – education and experience
Continuing professional education requirements
Code of Ethics
Quality control:
Engagement level (ISA 220)
Firm level (ISQC 1)
Profession level (e.g., peer review)
Multi-disciplinary approach
Solid grounding in the assurance process
Rigorous assurance standard - ISAE 3000
Subject matter knowledge - experts
9 July 2006
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
Limitations
Financial experts, not sustainability experts
Negative assurance
Suitable criteria
Recommendations
Is the right information being reported, not just is the
reported information right (i.e., relevance as well as
reliability)
Completeness
The most difficult area, even when have good criteria
Determining what is material is difficult given the diversity of
readers and their needs
Negative assurance appropriate for completeness?
ISAE 3000 use by others
9 July 2006
Accounting for Good: the Global Stakeholder Report
9 July 2006
Accounting for Good: the Global Stakeholder Report
“The most important forces boosting credibility are:
the completeness of reporting with regard to material
sustainability issues,
openly addressing weaknesses, unsolved problems
and conflicts,
statements of third parties in a report,
formal external verification, and
the general public image of the company and the
public assessment of its material sustainability
performance.”
9 July 2006
Overview
Why sustainability reporting and why assurance?
What assurance are we talking about?
IFAC & IAASB
Assurance Framework & ISAE 3000
Limitations and other approaches
9 July 2006
Sustainability Reporting
An External
Audit Perspective
michaelnugent@ifac.org
www.ifac.org