It's time auditors questioned the content of greenhouse gas statements, argues Gin Chong
In March 2012 the International Auditing and Assurance Standards Board (IAASB) issued the International Standard on Assurance Engagements (ISAE) 3410, Assurance Engagements on Greenhouse Gas (GHG) Statement. The statement sets the constituent elements, quantifies a firm's GHG emissions over an accounting period, shows the comparative information, explanatory notes, including a summary of significant quantification and reporting policies, and gives a detailed listing of removals or emissions deductions. Auditors are required to provide assurance on these disclosures.
ISAE 3410 is a landmark standard in many respects. It responds to the societal demands for a standard that supports quality-assurance services in a regulated sector, deals with engagements that largely need multidisciplinary team members, and sets the requirements and reporting responsibilities for performing assurance engagements. It provides illustrative reports that distinguish between reasonable and limited assurance engagements, and shows how limited assurance reports may be tailored to enhance the users' understanding of the obtained assurance.
Over the years, those engaged in assurance on sustainability and carbon emissions information have called on the IAASB to issue a standard that deals with emissions reporting schemes as part of a regulatory disclosure regime; emissions trading schemes such as the EU emissions trading system; and informing stakeholders on a voluntary basis.
As voluntary disclosures became more common, companies have asked auditors to verify these disclosures in a stand-alone document as part of a broader sustainability report in addition to the regular annual report.
ISAE 3410 requires the auditors to obtain a reasonable or limited assurance about whether the GHG statement is free from material misstatement due to fraud or error, to report whether it is a reasonable assurance engagement and that the GHG statement is prepared in accordance with the applicable criteria, or whether it is more of a limited assurance engagement, effectively a GHG statement which is not prepared in accordance with the applicable criteria. It is their duty to report back to the board and communicate the findings.
Reasonable or limited assurance
The IAASB's glossary to the terms defines a 'reasonable assurance engagement' as the objective of reducing an assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for expressing the auditors' conclusion.
By contrast, a 'limited assurance engagement' has the objective of reducing the assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expressing the auditors' conclusion.
In short, the ISAE 3410 requires auditors to exercise due care in understanding the company's activities and its environment, identifying and assessing risks of material misstatement, and assessing the overall risk responses and procedures.
In all engagements, auditors are expected to obtain an understanding of a firm's internal control systems, but for a limited assurance engagement, the auditors need not do so due to significant additional costs and efforts. They need to focus on the firm's control environment, information system including business processes and communication of emissions reporting roles, results of the entity's risk assessment process, additional work and costs on understanding the control components, materiality thresholds, and implications on the audit risk and liabilities.
For a limited assurance engagement, it is important to assess an organisation's risk level based on the nature of the information. GHG information is not subject to rigorous double-entry bookkeeping systems and is susceptible to different risks. The fixed nature of physical or chemical relationships between emissions and other measurable phenomena allow for analytical review procedures, but without these procedures, supplement inquiries become less effective. A limited assurance engagement may relate to emissions from electricity use at a single office, emissions from complicated physical or chemical processes at several facilities, or emissions using information collected from various entities in a supply chain. Different engagement circumstances warrant different assurance procedures.
For a limited assurance engagement, the auditors must include a statement that the procedures vary in nature from and are less in extent than a reasonable assurance engagement, and the level of assurance is substantially less than a reasonable assurance engagement. For a reasonable assurance engagement, auditors should state that the audit was based on one of the following:
- standardised approach based on a list of standardised procedures. Delete those procedures that are irrelevant to the engagement;
- customised approach. Similar to the standardised approach, but allows for further details on the procedures performed; or
- free-form approach. This allows for more narrative on the nature and extent of the procedures performed.
The free-form approach may cause confusions to annual report users. The standardised and customised reports have significant overlaps in the procedures and reports. Thus, IAASB allows for one customised, illustrative report. This report contains standardised procedures to be performed in every engagement and allows for customisation of procedures to provide users with more details on the work performed and the basis for understanding the level of assurance, requires the auditors to address the audit risk on the procedures and to insert a statement that 'a limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an understanding of internal control, and those procedures performed in response to the assessed risks'.
ISAE 3410, para 60 requires auditors to verify the comparative information, ensure consistencies in quantification policies, report any material misstatements, explain the nature of comparative information in the GHG statement, and explain their responsibility in considering appropriateness of comparisons.
Paragraph 73(e) requires the auditors to provide a statement on the basis of identifying and distinguishing the scientific and estimated uncertainties on emissions, and to report the extent of reliance on the experts' advice on the estimations.
The statement has been effective since September 2013. It will be interesting to assess how the auditors reacted to these requirements.
Gin Chong PhD, FCCA is professor of accounting at Prairie View A&M University, Texas
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