Sustainability reporting raises auditor independence red flags
Research shows that audit professionals are being asked to expand their offerings to prepare for sustainability reporting changes, leading to auditor independence and quality concerns.
While environmental auditing is not a new idea, its rapid expansion in recent years has raised doubts around auditor independence and the quality of sustainability assurances.
In a recent literature review, University of Sydney accounting professor, Clinton Free, wrote that the auditing profession has struggled to adapt to sustainability reporting despite auditors believing that their expertise is transportable.
There are several reasons why the adaptation has proven so difficult, but among the most significant is the idea that financial auditing tends to rely on quantifiable, objective data while sustainability data is often more qualitative and multidimensional.
“More generally, while auditing techniques are inherently backward-looking, sustainability is fundamentally forward-looking,” wrote Free.
To date, sustainability audits have been largely informal and unregulated, meaning auditors may be entitled to pick and choose from the “black box of sustainability assurance” methodologies and processes, the research claimed.
Existing research has exposed a “large degree” of management control over the assurance process, raising doubts about the independence of audit assurance.
“While there is an increased pressure to regulate assurance concepts and methods, quality appears to be an important variable and the lack of independence between the preparer and the assuror combined with forces of commercialism fuel the challenges to be faced as well as a heightened risk of continued greenwashing,” wrote Free.
One study cited by Free found that assurance auditors “frequently” sell pre-assurance services to their clients ahead of a later, more formal assurance engagement.
While these services are packaged in a variety of ways, their selling point appears to be the opportunity it affords clients to obtain a private audit before committing to a final, public audit.
To date, sustainability assurance processes have also tended to differ significantly in their methodologies. As cited by Free, researchers have pointed to a developing “black box of sustainability assurance,” in highlighting the range of different approaches.
In 2019, research by Channuntapipat et al found that the approach employed by sustainabity assurance auditors is “the product of a negotiation between the auditors and the clients over a shared meaning of sustainability and assurance.”
As noted by Free, those two concepts (i.e., sustainability and assurance) are “still largely open for interpretation which can lead to substantial differences from one assurance engagement to another.”
One research paper found “very heterogenous and uncertain” criteria applied between sustainability assurance engagements with mining companies.
The concept of environmental auditing is by no means a new one. As noted by Free, the trend of accountants competing for work in the “environmental auditing field” was first observed in an academic paper in 1997.
At any rate, demand for and scrutiny of environmental assurance has increased in recent years as regulators continue to develop sustainability-specific fraud legislation and ‘greenwashers’ are increasingly called to account.
This has led to what is referred to as an “evolution gap” – a subset of the better known “expectations gap” among the audit profession – by which the public expects a level of assurance beyond current standards.
The introduction of non-financial sustainability and social performance data into traditional reporting processes is sometimes referred to as impact accounting.
According to a 2021 PwC survey cited by Free, 70 per cent of the 325 surveyed global investors answered that companies should be required to obtain assurance on all material ESG disclosures.
The same number of respondents said these disclosures should be assured to the same level of confidence as financial disclosures.
Pressures are mounting on Australian companies to prepare for the new mandatory climate-related financial disclosure legislation which will affect Australia’s largest emitters from next year.
The legislation will require captured entities to prepare a “sustainability report” per the sustainability rules developed by the Australian Accounting Standards Board.
ASIC chair Joe Longo warned businesses last week that businesses must begin preparing now, adding “It’s simply not an option to put this off until after the legislation has passed, and then scramble to comply.”
