Sustainability information – give us an audit, or give us nothing!

Let’s return to the Consultation Paper recently issued by the Trustees of the IFRS Foundation “to assess demand for global sustainability standards and, if demand is strong, assess whether and to what extent the Foundation might contribute to the development of such standards.”

One of the main options outlined in the paper was for the Foundation to establish a new sustainability standards board. As the accompanying news release summed it up: “The new board could operate alongside the International Accounting Standards Board under the same three-tier governance structure, build on existing developments and collaborate with other bodies and initiatives in sustainability, focusing initially on climate-related matters.” We previously looked at some of the feedback relating to that last point, and to the proposed approach to materiality. The paper also posed the following question: “Should the sustainability information to be disclosed be auditable or subject to external assurance? If not, what different types of assurance would be acceptable for the information disclosed to be reliable and decision-useful?”

Deloitte covers the pro-assurance case in its response:

  • In our view, the sustainability information disclosed in annual reports should be capable of being audited or subject to external assurance. Independent assurance can enhance the reliability of information that companies disclose. Assurance reflects the seriousness of the reporting and provides a greater confidence in the non-financial disclosures. We note that, at present, very little of the sustainability information provided by companies is assured.
  • In our view, because sustainability information is increasingly used by capital market participants, it needs to be credible and well supported, evidencing the quality of the process for accumulating and reporting the information, the oversight of the reporting, and the ability of the information to withstand outside challenges. This governance should be of the same quality as that required for financial information, if the information provided by it is to be truly decision-useful.
  • Further, the target level of assurance to be provided in the medium term should be reasonable assurance on the entire non-financial information reporting…starting with an overall limited assurance on the whole non-financial information statement, including on the materiality assessment process, could be an option. Providing reasonable assurance on specific areas/key performance indicators could also be feasible in the short-term.

Ernst & Young and KPMG acknowledged more explicitly in their comment letters that if very little of the currently-provided information is assured, presumably there would be incremental short-term value just in providing better information, whether or not externally-assured:

  • In recognition of the fact that reasonable assurance on sustainability reporting, at least in the short term, may be challenging due to the relative lack of maturity and lack of suitable skills, limited assurance might be a temporary approach, provided that a minimum level of work effort (including substantive testing) is performed which should then turn into a reasonable assurance in the mid to long term.
  • …we recognize that in the short term, assurance over specific aspects or disclosures of non-financial information in an annual report may be more readily achievable rather than assurance over the entire report.

PricewaterhouseCoopers, while noting that “the assurability of such information is a baseline expectation for building a high degree of ‘trust’ in such information, answered the question a bit differently (and more practically):

  • The SSB ultimately will not be the one to decide on whether the information is subject to assurance; this will be determined by jurisdictional or regional regulators. However, as mentioned it is important for the SSB to have a close relationship with the IAASB to monitor and evaluate the need for changes to assurance frameworks or existing standards for auditors or other external assurance providers to be able to provide assurance on the reported information. Regulators will also need to determine whether they require companies to report on the internal controls associated with the preparation of this information and what certifications and attestations are required by executive officers regarding such information.

And then, while I made no attempt to review more than a few of the 500 (!) comment letters received, it didn’t take long to find one which was less concerned about that aspect of the issue. This is The Shareholder Commons:

  • …while assurance may be desirable where possible, disclosure requirements should not be limited to what assurance providers are prepared to audit. Disclosure of information including governance, strategy and management approach is important for a variety of stakeholder audiences, including investors. The absence of assurance does not prevent information from being useful.

And that’s the side I would come down on. Quantitative information contained in (say) MD&A and other management commentary and in news releases isn’t audited or assured, and while some might advocate that it should be, it would be absurd to say that the information is rendered entirely non-useful (or, put another way, useless) by its absence. Certainly, to focus excessively on assurance-related issues at the outset of the new proposed board’s existence would be a good way of going nowhere at all. I’ll close on a different although related note, from Daedalus Business Services Ltd.:

  • You have the option to make this issue the biggest issue in accounting for decades to come, which is what it should be given the urgency of climate change. Instead your proposal sweeps it to one side and treats it as peripheral. This will no longer do. I urge you to rethink, and to propose integrated financial and sustainability reporting as the way forward for accounting standards.

The opinions expressed are solely that of the author.

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