ASSURANCE: the front line against global warming Prof Roger Simnett

Content of presentation Accounting and auditing standard-setters: where are they positioned in relation to developing standards on sustainability (community, environmental, social) information? Review sustainability information currently being reported and assured Identify possible future directions for the reporting and assurance of sustainability information

Developing sustainability reporting standards Those charged with developing accounting standards are reluctant to produce standards around sustainability Some developments by other standard-setting bodies; some voluntary disclosure by individual entities The most comprehensive framework is that of the Global Reporting Initiative (GRI)

Issues around developing auditing standards Difficult for the auditing profession to audit disclosures if we do not have generally accepted reporting disclosures for sustainability (“suitable criteria”) Audit standard-setters are reluctant to be involved in setting suitable criteria Audit of sustainability information has been seen as something of a periphery service

What are auditing standard-setters doing? International Auditing & Assurance Standards Board (IAASB) established the Sustainability Expert Advisory Panel (SEAP) in 2004 Primary charge: liaise with the GRI to have revised GRI Guidelines ( “G3”) generally accepted by the auditing community as suitable criteria. (G3 released October 2006) Also charged with:  advising IAASB on developing guidance for assurance on sustainability reports, and  working with national standard-setters on developing national assurance standards

How effective has SEAP been? Questionable: No current voice on IAASB and limited resources Membership of SEAP is an issue. Includes sustainability assurance experts from all around the world, but they have no great voice in auditing standard-setting Certainly had some influence on GRI G3 Have worked with the Dutch on their assurance standards (released October 2006) Have been asked in last couple of weeks to prepare brief for IAASB regarding guidance

World snapshot: sustainability reports by nation

World: sustainability reports by year

World: who assures sustainability reports?

Audit professionals assuring sustainability reports

Where to from here? Now GRI G3 has been released, anticipate more entities will produce stand-alone sustainability reports  Partly because of improvements in GRI G3  Partly a result of world-wide events and movements Will see greater voluntary disclosure within financial statements Will see separate initiatives to collect and disseminate information Expect greater demand for assurance

Future directions for stand-alone reports Not quite mainstream. Suitable criteria still an issue. To avoid criticisms of greenwash, significant difficulties with two assertions:  Completeness: Have we covered all the issues when we are not even sure who the report is intended for? (boundaries) e.g. concerns of different stakeholders may include diverse areas such as labour practices, environmental emissions and use of resources, social impact of business practices  Accuracy: Different units of measure. Causes various difficulties, including what is material misstatement?

Developing assurance standards Many hurdles: Who are the stakeholders receiving the reports? Should the same level of assurance apply to all assertions of management? (e.g. completeness)  something the profession has never contemplated before Material misstatement What if dual reporting, and one party is not an accounting firm?  not bound by our standards / code of ethics?

A way forward… Assurance on comprehensive sustainable reports is difficult… … but can be done First, tackle the easier assurance elements Major issues: specific environmental issues (Stern report, Gore initiative, many other initiatives). Focus on generally agreed specific issues addresses concerns of management cherry-picking issues.

World-wide: Global Carbon Emissions Carbon emissions can be disclosed and disclosures can be verified. Assertions of completeness and accuracy can be addressed  Evidenced by practice of global carbon trading, as in some parts of the world, and as outlined in Stern Report Can work hand-in-hand with other initiatives such as Global Carbon Disclosure Project (GCDP). In Australia, 53% of ASX100 companies responded to GCDP 2006 questionnaire, and 4 provided information. Self- reporting seen as a limiting factor.

How to make this issue mainstream? Include disclosure as footnote to financial statements, rather than separate reports or databanks Total carbon emissions  for this year  for the past year  additional qualitative information Assurance on this footnote is then provided by audit report to financial statements Assurance can be provided under new form audit report under “other reporting responsibilities”

Specific environmental issue in Australia: Water Usage Can verify completeness and accuracy Similar reporting and assurance procedures as proposed for carbon emissions For both issues, disclosures could possibly commence on a voluntary basis Assurance is provided as part of financial statement assurance Assurance standard-setters can provide specific guidance if required

Advantages of this approach Brings sustainability/environmental issues into the mainstream Will lead directly to greater shareholder and investment community attention Meets immediate societal concerns. Surveys show taxpayers willing to pay more in taxes and shareholders willing to sacrifice short-term profits for a sustainable future Accountability and credibility of disclosures => greater likelihood of corporate initiatives to reduce emissions / usage which achieves aims of government & society

Disadvantages of this approach Additional costs of data capture and disclosure and additional costs of assuring (some companies are already capturing and disclosing related information) Cherry-picking of issues (although cherry-picking by someone other than management) Only a small sample of the many issues necessary to address long term sustainability can be included Which companies would voluntarily disclose this information? (this in itself is a signal to the market)

A new day is dawning Environmental information flows are quickly evolving The accounting and assurance professions need to move in a coordinated fashion and with speed in order to play a major role in this area. This has direct societal benefits. Will this be an opportunity lost to our profession and our society?