17-65 AICPA, IFAC, IAASB, and PCAOB
a. How do the sustainability-related activities of these organizations differ? And how are the similar?
American Institute of Certified Public Accountants, AICPA, the world’s largest member association representing the accounting profession sets ethical standards, auditing standards and develops the CPA Exam.
The AICPA has joined forces along with the other major accounting bodies around the world in support of the Prince Charles of Wales’ Accounting for Sustainability Forum (A4S). In December 2009 the AICPA joined with the A4S Forum in a call for the development of a universally accepted connected or integrated reporting model.
Connected or integrated reporting, is the reporting of both financial and non-financial information, including sustainability information, in an integrated way, as contrasted with the current prevailing practice of issuing separate, stand-alone financial and sustainability reports.
The trend towards connected reporting is responsive to the perceived need for enhanced reporting that connects strategy, risk and performance, and encompasses financial measures, key performance drivers, and sustainability opportunities and impacts.
In 2014, the AICPA engaged Verdantix, an independent research firm, to produce a market size and forecast model for 2013 to 2017 covering sustainability assurance and related advisory services in the U.S. Market size was determined from a bottom up analysis based on data provided to Verdantix by assurance providers for its research and validated by interviews. The growth forecast was derived from observed market growth in Verdantix surveys of decision-makers. (The models are based on the assumption that sustainability reporting will not become mandatory by 2017.) The report also looked ahead to potential developments in 2018 to 2022.
AICPA’s Benefit of Assurance
Sustainability information assured by CPAs communicates an organization’s commitment to the priorities, values and concerns that are of the greatest importance to their growing and increasingly diversified audiences. Assuring sustainability information results in improved systems and processes surrounding collection of sustainability data and ultimately more reliable information. Producing reliable sustainability information in turn results in: • Increased stakeholder confidence in the information • Improved decision-making by the organization Other key competitive benefits that result include: • Higher rankings among leading sustainability raters and rankers like CDP (formerly, the Carbon Disclosure Project) and Dow Jones.
Sustainability Indices (DJSI) • Enhanced brand reputation • Improved ability to attract and retain employees • Stronger performance and efficiencies • Cost savings • Improved risk management.
IFAC: International Federation of Accounts is the global organization for the accountancy profession dedicated to serving the public interest by strengthening the profession and contributing to the development of strong international economies. IFAC is comprised of over 175 members and associates in 130 countries and jurisdictions, representing approximately 2.84 million accountants in public practice, education, government service, industry, and commerce.
IFAC Sustainability Framework 2.0
The updated Sustainability Framework consolidates the important aspects of embedding sustainability into the DNA of an organization and can be applied to entities of all sizes and complexities. This edition focuses on the integration of sustainability factors from three perspectives–business strategy, operational, and reporting– and highlights the important roles that professional accountants play in facilitating the sustainable development of their organizations.
What Do We Mean by Sustainability?
Many definitions of sustainability and sustainable development exist, but arguably the foremost, and most widely accepted, is from the Report of the Brundtland Commission: Towards Sustainable Development, which states: “Sustainable development is not a fixed state of harmony, but rather a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs.”
Public recognition of the importance of sustainability and sustainable development is changing business culture and society. Two critical global challenges include dealing with national accounting systems that do not comprehensively reflect this progress, and ensuring that organizations embrace their performance on three levels:
Economic: goes beyond financial performance to reflect an organization’s wider impact on the economy, and recognize that profitability, growth, and job creation lead to compensation and benefits for families and to tax generation for governments;
Environmental: relates to the natural resources consumed in delivering products and services, and the environmental impact of the organization’s operations; and
Social: reflects an organization’s impact on people and social issues, which include (a) health, skills, and motivation on the people side, (b) human relationships and partnerships on the social side, and (c) business conduct and ethics.
From a business perspective, achieving sustainable value for investors and stakeholders means that organizations must do more than only complying with external laws and regulations. Taking a sustainable path requires organizations to give back more than they take in relation to critical economic, environmental, and social factors that their business models depend upon.
Two useful resources on the breadth of issues included in sustainability are The Sigma Guidelines—Toolkit: Guide to Sustainability Issues and the Global Reporting Initiative’s Sustainability Reporting Guidelines.
The Role of Accountants and the Accountancy Profession
Sustainability is on many organizations’ agendas; however, environmental and social responsibility issues are typically disconnected from core business strategy, and too few organizations include it on the agenda of the chief executive officer and chief financial officer (CFO).
Accountants have a leadership role to play in embedding sustainability factors into an organization’s strategy and decision-making processes to achieve sustainable value creation, and being more transparent and informative on how value is created for stakeholders.
Accounting for sustainability is fundamentally about improving business decision making in:
Responding to uncertainty and risk, and seizing growth opportunities through developing existing and new markets;
Innovating processes, products, and services that can provide societal benefits;
Driving operational efficiency and lowering costs by way of lean operations; and
Inspiring people including employees, customers, and suppliers.
Accountants’ and finance professionals’ roles in this area are increasing, primarily among larger organizations and at senior levels. For example, in a 2012 Deloitte Touche Tomatsu global survey, 26% of CFOs said that they are accountable to the board for their company’s sustainability strategy—a 9% increase over 2011. A majority of CFOs (53%) said their involvement in sustainability increased in the previous year; even more (61%) expect greater involvement in sustainability over the next two years.
According to various surveys, including the IFAC SMP Quick Poll, accounting practices are increasingly providing sustainability services to their clients. These services include advisory, accounting, and assurance, with the former the most common.
In response to this need, the accountancy profession is raising awareness of the importance of accounting for sustainability, helping to prepare accountants and the organizations they serve, and supporting developments in thinking as well as practical tools and guidance. In conjunction with others, the profession is leading multiple initiatives to help accountants, clients, and organizations embrace management practices and processes that help integrate sustainability into decision making.
IFAC works closely with the Prince of Wales’ Accounting for Sustainability Project (A4S), which emphasizes the importance of the connection between accounting and sustainability, and The Economics of Ecosystems and Biodiversity (TEEB) for Business Coalition, which is developing guidance to successfully incorporate natural capital into strategy and decision-making processes. In addition, IFAC is significantly involved with the International Integrated Reporting Council (IIRC), which is developing an international framework to help organizations report how strategy, governance, performance, and prospects lead to the creation of value over the short, medium, and long term. IFAC also supports the Climate Disclosure Project’s Climate Disclosure Standards Board, which issued the Climate Change Reporting Framework, and the Global Reporting Initiative.
IAASB: The International Auditing and Assurance Standards Board is an independent standard-setting body that serves the public interest by setting high-quality International Standards for auditing, assurance, and other related Standards, and by facilitating the convergence of international and national auditing and assurance Standards. In doing so, the IAASB enhances the quality and consistency of practice throughout the world and strengthens public confidence in the global auditing and assurance profession. The structures and processes that support the operations of the IAASB are facilitated by the International Federation of Accountants (IFAC).
IAASB Enhances Standard for Assurance Engagements
In today’s global economy, there is strong public interest in high quality, relevant assurance on information beyond the audit or review of financial statements. Recognizing this, the International Auditing and Assurance Standards Board (IAASB) today released an updated and enhanced International Standard on Assurance Engagements (ISAE), titled ISAE 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, which addresses a broad range of assurance engagements.
“The importance of relevant and consistent high quality engagements for assurance services cannot be understated. Preparers and users alike already look to the accountancy profession to provide assurance services on an expansive range of information, and this is anticipated to continue to grow. ISAE 3000 (Revised) provides the platform for practitioners to provide such services, and to develop new assurance services over many different subject matters, while enhancing the quality of such engagements,” noted Prof. Arnold Schilder, IAASB Chairman.
ISAE 3000 (Revised) covers a wide variety of engagements, ranging from assurance on statements about the effectiveness of internal control, for example, to assurance on sustainability reports and possible future engagements addressing integrated reporting. The standard covers both reasonable and limited assurance engagements, and introduces guidance designed to help readers better understand these two levels of assurance.
“ISAE 3000 (Revised) is the overarching standard for current and future topic-specific ISAEs and assurance engagements where no separate ISAE exists. As a result, the IAASB’s revision involved striking an appropriate balance between ensuring that the standard is sufficiently robust, and that it is able to also facilitate innovation in the dynamic and evolving field of assurance,” noted James Gunn, IAASB Technical Director.
International Standard on Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other than Audits or Reviews of Historical Financial Information
This revised assurance standard deals with assurance engagements other than audits or reviews of historical financial information. In revising ISAE 3000, the IAASB also agreed amendments to the International Framework for Assurance Engagements, as well as ISAE 3402, Assurance Reports on Controls at a Service Organization, ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, and ISAE 3420, Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus. ISAE 3000
(Revised) is effective for assurance engagements when the assurance report is dated on or after December 15, 2015.
Examples of Attestation Engagements (Ref: Para. 12(a)(ii)(a)) A8. Examples of engagements that may be conducted under this ISAE include: (a) Sustainability – An engagement on sustainability involves obtaining assurance on a report prepared by management or management’s expert (the measurer or evaluator) on the sustainability performance of the entity.
In many attestation engagements the responsible party may also be the measurer or evaluator, and the engaging party. An example is when an entity engages a practitioner to perform an assurance engagement regarding a report it has prepared about its own sustainability practices. An example of when the responsible party is different from the measurer or evaluator is when the practitioner is engaged to perform an assurance engagement regarding a report prepared by a government organization about a private company’s sustainability practices.
Guidelines and requirements for sustainability reporting and the provisions of assurance on sustainability are continuing to evolve. Currently, there is general broad agreement about what sustainability means, and various frameworks and standards assist companies in producing relevant and reliable sustainability data for external users. Further substantial variety exists in companies’ decisions about the level of assurance to obtain on sustainability disclosures. Sustainability reporting will likely continue to be a growth area into which auditors can apply their assurance skills to expand services outside the traditional audit assurance services. (Chapter 7, p. 856)
The public accounting profession has a long history of developing and working with assurance methodology from financial statement audits and reviews to audits of the effectiveness of internal control, and for various industries. CPAs have experience with numerous types of systems, information processes, and control frameworks. Such experience has developed the CPA’s capability to identify control weaknesses and other risks of misstatement. An integral part of a sustainability reporting or GHG assurance engagement will be the consideration of the controls over the capture, calculation, and accumulation of various types of nonfinancial information, including GHG emissions.
The world is ever-changing, requiring CPAs to learn new subject matters and develop new specializations; accordingly, CPAs are typically not fazed by the need to learn and develop new skills. CPAs will need to learn new terminology and scientific concepts, particularly with respect to GHG emissions information, to accept the attest engagement. CPAs also will need to have an understanding of the nature of various business risks to an organization and the relationships within nonfinancial information and between nonfinancial information and financial information to provide assurance on sustainability reports.
CPAs can leverage their knowledge as financial statement auditors when providing assurance on sustainability reports, which cover a variety of economic, environmental, and social matters, or GHG emissions information. However, any skepticism about CPAs becoming involved in the area of GHG emissions reporting may be put to rest when there are financial statement effects to deal with, such as the monetization of reductions of GHG emissions in the form of credits that can be bought and sold, or the incurrence of liabilities for exceeding regulatory limits. Accordingly, the time is right for learning about sustainability and GHG emissions reporting, and providing assurance thereon
The AICPA previously issued Statement of Position (SOP) No. 03-2, Attest Engagements on Greenhouse Gas Emissions Information, to provide guidance to CPAs on how to apply the attestation standards to GHG emissions reporting for an examination level of service with the expectation that it would be used to satisfy requirements for assurance in connection with GHG trading programs or regulatory submissions. However, the first requests coming through for assurance in the United States are not to satisfy regulatory requirements but, rather, appear to be from companies that are voluntarily looking to add more credibility to information that they are publicly reporting. As a result, they are seeking assurance for this purpose at a more cost-effective level than an examination.
To respond to this need, the AICPA developed application guidance on how to apply the attestation standards for a review engagement to the specific subject matter of GHG emissions information, resulting in April’s issuance of SOP No. 13-1, which supersedes SOP No. 03-2.
One of the most significant difficulties encountered in the development of ISAE 3410 was how to clearly delineate the scope of work between the two levels of assurance. How do the nature and extent of procedures differ? One significant difference between GHG emissions and financial statement attest engagements is that there is no double-entry bookkeeping in GHG emissions reporting, for which a range of analytics and inquiries might be performed, as there is for financial statements. Accordingly, performing analytics and inquiries alone with respect to GHG emissions information might not yield sufficient evidence for the limited assurance conclusion to be formed (otherwise known as “negative assurance” in the United States). As a result, some detail testing by corroboration with independent evidence may be necessary in a limited assurance engagement.
In 2012, the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants issued International Standard on Assurance Engagements (ISAE) 3410, Assurance Engagements on Greenhouse Gas Statements, to perform both “reasonable” and “limited” (known as “moderate” in the United States) assurance engagements on GHG statements.
All three organizations are very similar, and are all working towards the same goals of international sustainability reporting, they have their agendas, projects, white papers, discussions on the assurance of sustainability reporting, however, as our book explains (Chapter 7, p. 859). The general standards for providing assurance and attestation services can be adapted to the context of sustainability reporting, but such standards do not address sustainability specifically.
I do concur that connected or integrated reporting, the reporting of both financial and non-financial information, including sustainability information, in an integrated way, as contrasted with the current prevailing practice of issuing separate, stand-alone financial and sustainability reports is the way to go. However, I don’t see this happening in the near future, because the sustainability information is a voluntary process, in which many corporations are not ready or willing to disclose (transparency, and it’s an expensive process.
In regards to PCAOB: SASB is already working with the Public Company Accounting Oversight Board (PCAOB), which regulates auditors, to come up with standards for the external assurance of sustainability reporting. (PCAOB already has its own external assurance standards.)
b. If there is an organization that does not address sustainability, comment on the implications of that decision.
Comment letter to respond to the PCAOB invitation to comment on its Exposure Draft Concerning the Auditor’s Report on an Audit of Financial Statements. Page 11
Table 2: An analysis of how the PCAOB ED responds to the “information gap” concerning entity ‘other’ financial statement information.
14. Sustainability: Not addressed by the proposed standard and not on the PCAOB agenda. Minimal prior research on the value of assurance on most types of non-financial information. Moderate prior research on assurance of sustainability reports. Significant opportunities abound, e.g., investigating the impact of assurance on the quality of management forecasts.
Retrieved from http://pcaobus.org/Rules/Rulemaking/Docket034/91b_Mock.pdf
c. What are the implications of differences in sustainability assurance provisions internationally?
Assurance on sustainability reporting is not required under any law in any part of the world. The guidelines related to assurance on sustainability reporting are used by auditors to verify, validate, assure or review the sustainability reports issued by companies. Some sustainability assurance guidelines are international in nature. Examples of this are the International Standard on Assurance (ISAE) 3000 and AccountAbility 1000 Assurance Standard (AA1000AS). Others are regional in nature. Examples of regional sustainability assurance guidelines are NIVRA 3410N (the Dutch sustainability assurance guidelines) and AS/NZS 5911 (the Australian sustainability assurance guidelines.) Assurance providers can use one or more guidelines of their choosing to verify, validate, assure or review sustainability reports. Since there are only guidelines, and due to the fact that sustainability reporting is on a voluntary basis, corporations throughout the world are not required to be transparent on their financials. Internationally, there are different perspectives on economic, social, and environmental performance, due to the perceptions of a country culture, ethics, and values, which will effect a corporations’ sustainability reporting. And, it is important to note that the disclosures vary from country to country, and the disclosures are related to a country’s level of accounting and auditing standards, and systematic differences across countries.
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