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1 1 Sustainability assurance as a driver of change for the auditing profession BAA annual conference 2008 Anton Du Toit Academic Director: Accounting Monash South Africa (wholly owned by Monash University)

2 2 1.Introduction 2.Literature survey 3.Brief survey of reports 4.Analysis of findings 5.Conclusion and closure Sustainability assurance as a driver of change for the auditing profession

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4 4 1. Introduction 1.1Background 1.2 Problem statement 1.3 Objectives and methodology

5 Background Profession: client size, international competition, computers Next: sustainability assurance (SA)? Financial statements, IFRS and annual report traditionally Corporate governance growth (e.g. Cadbury) Steady increase in reporting on sustainability, covering social, environmental and economic performance Now in stand-alone sustainability report (or CSR or social or environmental or corporate accountability reports) GRI guidelines for reporting

6 Background (continued) Verification and assurance needed AA1000 AS of AccountAbility ISAE 3000 of the IAASB Bigger focus on non-financial information (BR in the UK & SOX in USA) Demise of SME statutory audit Auditor competent to provide sustainability assurance?

7 7 Current trend: 2 glossies Nedbank 2006 Sustainability Report (Economic, Social and Environmental bottom line – 123 pages) Nedbank 2006 Annual Report (Chairman, Operations, AFS) (Fin. Bottom line) – 298 pages Independent Audit Report by KPMG & Deloitte: Reasonable Assurance Verification Statement by Ernst & Young: Limited Assurance

8 Problem statement Auditors education never included prospective data, non-financial information, language, semantics Furthermore, large variations in sustainability reporting and SA worldwide Profession is changing, but not enough research into the philosophy of auditing and practical implications for providing SA

9 Objectives and methodology 1. Should auditor be involved from a philosophical perspective? 2. If so, which factors need to be addressed? Standards, education and training, disclosure Pre-study for PhD – this paper is on philosophical level, inter-disciplinary and reviewing trends for deductive arguments. Empirical research still to be performed. NOT: Reasons for SA, markets

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11 Literature survey – brief history Bookkeeping audit More expensive labour in 1950s, clients larger. Statistical sampling, audit manuals, internal controls and systems approach Technological revolution Commercial pressure in 1980s Now: move towards non-financial and narrative reporting, change in profession needed.

12 Literature survey – postulates Verifiability No conflict of interest Fin info free from irregularities Good internal controls Consistent GAAP What was true in the past will hold true for the future Independence Professional – due care, etc. (Mautz & Sharf 1961) Still no audit risk and materiality, no non-financial info

13 Literature survey – sust reporting TBL coined by John Elkington in 1994 Many sources state increase in non-financial information and its importance Stakeholders becoming important with CG GRI Guidelines voluntary KPMG studies show increase in sustainability reporting and also in making it mandatory Assurance reports growing, mixed with other List of services in this area identified by ICAEW (2004)

14 Literature survey – SA GRI G3 includes + for having external assurance ISAE 3000 and AA1000 AS Also Germanys DRAFT IDW AsS821 and NIVRAs 3410N All 4 are critically compared with the postulates of Mautz & Sharaf (results in part 4) The FEE believes that SA is complex and that ISAE 3000 is not sufficient.

15 Literature survey – Competencies Auditor competent to do: Non-financial, narrative info: language and semantics skills? Predictive focus on data? ISAE 3400 – the examination of prospective financial info – 14 years later, no progress. The expert knowledge in technical areas of safety, health and environment – multidisciplinary teams? ISAE 3000 requires competencies but does not describe.

16 Literature survey – Competencies IRCA does provide a list of competencies: SA skills Stakeholder engagement skills Sustainability development expert knowledge The ability to make professional judgements No consideration of the need for logical skills yet Research of this area is at its minimum

17 Literature survey – Hurdles Complexity of data to be verified Cost considerations Resistance to change Emphasis still on financial information Profession able to change on philosophical sound basis? Skills and expertise available in this field Potential for liabilities Verifiability of non-financial and non-numerical information remains an issue

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19 Survey of reports Extracts not on statistical basis, just highlighting issues (reasonable assurance provided): … we will continue to promote renewable energies… (Endesa Chile SA) We expect further growth in 2007 (ABN Amro) This report contains forward-looking statements (ABN Amro) Significant growth is expected in (Rabobank) Auditors: KPMG: The report is reliable in all material respects… Excellent report by E&Y in BP 2007 – awarded

20 Analysis of findings Auditing profession is robust, is it dynamic? Standards (3 of them, not AA1000 AS) and postulates: No postulates or principles or philosophy dealt with Only ISAE 3000 mentions non-financial subject matter Conflict of interest: all 3 silent Audit risk and materiality sometimes mentioned, but descriptions still very hesitant Verifiability: called appropriateness, adequacy. Not yet solved Assertions mentioned but not properly described Audit evidence and tests seem to be properly discussed

21 Analysis of findings (cont.) Irregularities, fraud and errors, deficiencies mentioned, not described All 3 discusses internal controls and reliance thereon, but no objectives are set ISAE 3000 only one that is silent about referring to GRI Prospective nature of data almost totally ignored Lack of skills and expertise in language, semantics, logical skills, auditing prospective data, not sufficiently taken into account Hurdles as described in 2.6 Biggest challenge: language skills and the ability to express an opinion on narrative reports

22 Conclusion and closure Profession: principles and not commercial interests Conclusion: 1.The auditor could include SA, but the philosophical framework or foundation has not yet been developed 2.Practical implications are found in the recommendations below 3 areas of concern: 1.Better standards, based on postulates 2.Competencies, education and training 3.Research areas

23 Recommendations - standards Meetings and workshops: profession, bodies, other, academics – facilitate research; objectives and practical issues solved; codification of best practice on a global basis One set of standards then to be issued (auditors and others) (perhaps combining financial and non-financial as well) Auditors should demonstrate that they can do it – vast resources for research, road-shows and promotions Auditor should do it – well-known for integrity, objectivity and ethical compliance

24 Recommendations - Competencies Short courses, graduate courses, post-graduate. Audit firms ensure their competencies Logic to be part of syllabi Care in assurance on predictive non-financial information Consider registration with IRCA while setting up own level of registration (via IFAC and member bodies) Reasonable assurance: include statement that expectations, belief, opinions, future intentions, etc., are excluded from assurance (best practice of E&Y to be in standard!) Until one set of standards, refer to both ISAE 3000 & AA1000 AS

25 Recommendations – Research opportunities Postulates and philosophy – a new Mautz and Sharaf? Empirical surveys of firms, investors, educators Competencies and a framework for them Logic Technical expertise needed Learn from other assurance providers Co-operation between professional bodies Measurement of TBL data Limits of types of data to be assured

26 Closure Growing need for SA New Worldcom or Enron in 10 years time? Rather use sustainability assurance as a driver of change in the auditing profession to become competitive with others and to widen its scope (beyond financial) to address the needs of the international business society

27 27 The auditors problem is a definition: sustainable economics [s] - (n) what economists think is possible, but environmentalists do not. Let us all prevent the following of say nothing, hear nothing, see nothing:

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