1. Michael Nugent

2. Sustainability Reporting An External Audit Perspective Michael Nugent IFAC

3. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

4. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

5. 9 July 2006 ICAEW Survey May 2007 Institute of Chartered Accountants in England and Wales Investor confidence in audited financial information 200 fund managers 25% manage > £ 50 billion

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10. 9 July 2006 One interpretation 1. Long term sustainability = biggest concern 2. Not only financial information is used by analysts 3. Management comment and analysis is valued 4. 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. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

12. 9 July 2006 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. 9 July 2006 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. 9 July 2006 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. 9 July 2006 Accounting for Good: the Global Stakeholder Report Pleon Kohtes Klewes GmbH – 2005 world-wide survey Readers Expectations/satisfaction Corporate Social Responsibility reports

16. 9 July 2006 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. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

18. 9 July 2006 International Federation of Accountants 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

19. 9 July 2006 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. 9 July 2006 International Framework for Assurance Engagements Audits and reviews of historical financial information ISA 100+ International Standards on Auditing ISA 2000+ International Standards on Review Engagements Other assurance engagements ISAE 3000 International Standard on Assurance Engagements International Standard on Quality Control (ISQC 1) Corp. Gov.Etc, etc, etcInt. ControlSustainability IFAC Code of Ethics for Professional Accountants

21. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

22. 9 July 2006 Framework for Assurance Engagements 1. Three party relationship 2. Appropriate subject matter 3. Suitable criteria Benchmark Not just individual judgment Report quality, not level of performance 4. Sufficient appropriate evidence 5. Written assurance report Reasonable assurance Limited assurance

23. 9 July 2006 ISAE 3000 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

24. 9 July 2006 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. 9 July 2006 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. 9 July 2006 Overview Why sustainability reporting and why assurance? What assurance are we talking about? IFAC & IAASB Assurance Framework & ISAE 3000 Limitations and other approaches

27. 9 July 2006 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. 9 July 2006 Accounting for Good: the Global Stakeholder Report

29. 9 July 2006 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. 9 July 2006 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 Perspective michaelnugent@ifac.org www.ifac.org michaelnugent@ifac.org www.ifac.org