Audit quality to suffer under climate reporting bill: CA ANZ, CPA
Professional accounting bodies warn the government that its climate-related financial disclosure legislation could reduce audit quality and burden small businesses.
The nation’s largest professional accounting bodies – CA ANZ and CPA – have voiced their concerns that proposed climate reporting legislation will unjustifiably burden small businesses.
After welcoming the government’s “careful” approach to larger reporting entities, they said smaller private companies and not-for-profits did not appear to have been “commensurately considered or consulted.”
The disclosure rules, contained within the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024, are currently before Parliament.
From 1 January 2025, Australia’s largest listed and unlisted companies and financial institutions will be required to report on their climate-related financial performance.
The bill will require captured entities to prepare a “sustainability report” per the sustainability rules developed by the Australian Accounting Standards Board (AASB).
Group 3 entities – generally, those with consolidated revenue of above $50 million and below $200 million - considered to pose material climate-related risks or opportunities will be required to commence reporting from 1 July 2027.
Treasury estimated that only 5 per cent of Group 3 entities will be required to report under the proposed legislation.
However, Group 3 companies will be required to undergo an audit to prove that they do present the climate risks or opportunities that would trigger the reporting requirements.
According to CA ANZ and CPA, audits are usually only required where the information is material and consequential to stakeholders and tend to cost between $20,000 and $50,000.
The proposed legislation could “result in a flurry of reporting and auditing activities within SMEs where it is immaterial and of little consequence”.
This requirement appears to have been based on the assumption that the costs of carrying out this kind of audit would have been “negligible or nil” or else that the burden could be somehow lightened by a “locally developed standard,” said CA ANZ and CPA.
While the new, sustainability-specific auditing standards currently being developed to cater to the proposed legislation could lower the burden for smaller businesses, the professional bodies said this brings its own disadvantages.
“Any departure from the framework or ‘lowering of the bar’ aimed at lessening the costs involved would be adverse to the credibility and integrity of Australia’s auditing standards and international standing overall,” they said.
As is, the legislation would “result in a large skills and capacity cap.”
Separate CA ANZ survey data has mapped the extent of current auditor shortages, which are worst felt in regional areas and therefore more likely to include smaller practices.
To avoid the likely consequences of the legislation, the bodies recommended either raising the bar for Group 3 entities or by limiting the application of the audit requirement to public interest or disclosing entities.
“It is essential for government to monitor how implementation proceeds domestically, and relevant international experience, to frame a more refined and fit-for-purpose approach,” they concluded.
