Michael Nugent

1. Michael Nugent

2. Sustainability Reporting An External Audit PerspectiveMichael NugentIFAC

3. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

4. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

5. Institute of Chartered Accountants in England and Wales Investor confidence in audited financial information 200 fund managers 25% manage > £ 50 billion ICAEW Survey May 2007

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10. One interpretation • Long term sustainability = biggest concern • Not only financial information is used by analysts • Management comment and analysis is valued • Externally assured information is reliable Therefore, if a company publishes externally assured, non-financial information about long-term sustainability that includes management’s views, it will be used by many analysts, and used with confidence

11. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

12. 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”

13. 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”)

14. 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”

15. Pleon Kohtes Klewes GmbH – 2005 world-wide survey Readers Expectations/satisfaction Corporate Social Responsibility reports Accounting for Good: the Global Stakeholder Report

16. 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.”

17. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

18. 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 International Federation of Accountants

19. 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

20. 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 100+ International Standards on Auditing ISA 2000+ International Standards on Review Engagements ISAE 3000 International Standard on Assurance Engagements Sustainability Int. Control Corp. Gov. Etc, etc, etc

21. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

22. Three party relationship Appropriate subject matter Suitable criteria Benchmark Not just individual judgment Report quality, not level of performance Sufficient appropriate evidence Written assurance report Reasonable assurance Limited assurance Framework for Assurance Engagements

23. 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 ISAE 3000

24. 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

25. 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

26. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

27. 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

28. Accounting for Good: the Global Stakeholder Report

29. 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.”

30. Overview • Why sustainability reporting and why assurance? • What assurance are we talking about? • IFAC & IAASB • Assurance Framework & ISAE 3000 • Limitations and other approaches

31. Sustainability Reporting An External Audit Perspectivemichaelnugent@ifac.orgwww.ifac.org