Presentation on theme: "Www.monash.ac.za 1 Competencies and thinking skills required in modern auditing for dealing with sustainability assurance Public Sector Auditing Symposium."— Presentation transcript:
1 Competencies and thinking skills required in modern auditing for dealing with sustainability assurance Public Sector Auditing Symposium 30 January 2008 Midrand Conference Centre Anton Du Toit Academic Director: Accounting Monash South Africa Tel:
2 1.Introduction 2.Corporate Governance introduction 3.Literature survey: 1.Sustainability reporting 2.Sustainability assurance 3.Competencies of assurance providers 4.Thinking skills 4.Conclusion and recommendations Competencies and thinking skills required in modern auditing for dealing with sustainability assurance
4 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
5 Corporate governance can be defined as the manner in which an organisation is directed and controlled with a view to ensuring the achievement of its objectives in a sustainable manner within an environment of accountability to its stakeholders. It is about leadership with integrity. (Payne, 2002) 2. Corporate Governance introduction
6 Corporate Governance King III on its way: changes in Companies Act, Auditing Profession Act, Prevention and Combating of Corrupt Activities Act Public sector: PFMA, MFMA, Public Audit Act, Protocol on CG in the Public Sector No reference to sustainability or CG in the last group, only in King II
7 Corporate Governance Ethics Business ethics Corporate Governance By its very nature, corporate governance has an ethical dimension that can be viewed as the moral obligation for directors to take care of investors and other stakeholders (King II, 2002)
8 Corporate Governance Business ethics is the ethics applied in business when making decisions, so that the decisions are good and right for the business and/or also for other people (persons, communities or structures) influenced by those decisions.
9 Corporate Governance: ethical principles Honesty Integrity Keeping promises Loyalty (to all and to company) Fairness Caring for others Respect for others Responsible citizenship Pursuit of excellence Accountability
14 Corporate failures and global competitiveness: –Cadbury in UK in 1992 and King in SA in 1994 Steady increase in reporting on TBL: social, environmental and economic performance Some in AFS, or annual report Now in stand-alone sustainability report (or CSR or social or environmental or corporate accountability reports) TBL implies sustainability Financial bottom line part of Economic bottom line All the stakeholders were shown in the previous slide 3.1 Sustainability reporting
15 Sustainability reports: the GRI Sustainability reporting is the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development (GRI, :5) Latest framework of GRI is G3 – Aug 2006 Voluntary, currently companies Mandatory for France, South Africa and Denmark (stock exchanges) Independent assurance of the sustainability reports is growing, most still done by accounting firms
16 Sustainability reports: King II Annual report on nature and extent of its social, transformation, ethical and SHE management policies and practices Specifically: –SHE –Society and transformation, incl. BEE, gender, equity –Human capital
Providing Assurance Credibility, therefore not prepare and verify GRI only recommends external assurance Then rated as A+, B+ or C+ Two assurance standards: –ISAE 3000 of IFAC – mainly auditors –AA1000AS of AccountAbility – mainly others Standards are still criticised, e.g. by FEE
Competencies of Assurance Providers Language and semantics? Translations? Historical data – now prospective data? The technical areas of SHE? Multidisciplinary teams – understand business, environment and society Competencies very rare in literature and in reports ISAE 3000 requires competencies and to evaluate experts prof. competence
20 Competencies in literature survey FEE wants disclosure AA1000AS: Individual – Prof. qualifications, assurance experience in fin. and TBL Organisation – adequate assurance oversight, understand legal aspects, adequate insurance, structure to save material, independent from preparers
21 IRCA – International Register of Certificated Auditors Criteria for Certification as a Sustainability Assurance Practitioner: 1.Understand sustainability assurance (incl. auditing) 2.Understand stakeholder engagement processes and assess and assure 3.Understand sustainable development: TBL 4.The ability to make informed professional judgements on an organisations sustainability performance
22 ACCA report – the future of sustainability assurance (2004) 1.Technical competencies: assurance – Big 4 are strong 2.Process competencies: stakeholders, materiality, responsiveness and completeness – market researchers and assurance consultancies are strong 3.Substantive/ content competencies: Understand all in TBL, good judgement for reasonable or limited assurance is crucial 4.No individual or organisation has it all – use teams or advisory panels of experts
23 Competencies Literature survey (cont.) IRCA: definition of competencies very difficult and will evolve from year to year Boele & Kemp (2005): social auditors could learn from financial auditors, and vice versa Language and translation skills never mentioned Competency to predict the future also not. Applied mathematics is a core competency of economists, for example.
Thinking skills Logic: analytical and critical thinking processes Nothing in syllabi, except Mathematics Professional judgment is logical experience The auditor is per se a rational person Collect audit evidence to express an opinion If evidence is accepted or rejected in error, a thinking mistake was made
26 Thinking Skills: Virtues 1.Patience and intellectual tolerance; 2.Fairness – listen to all the facts before making a conclusion/expressing an opinion; 3.Be honest about ones own prejudices; 4.The willingness to analyse: distinguish things and separate them; 5.Compare things – get the logic context and systemise; 6.Try to do it in other ways – do experiments; and 7.Thoroughness and persistence.
27 Use thinking skills to: Solve problems Evaluate evidence Provide evidence Argue Analyse a problem in its components Detect errors in reasoning or in an argument Understand issues and modern day problems
28 Technique for basic elements: 1.What is the question or problem? 2.What is the objective or solution? 3.What do the important concepts mean? 4.What are the important facts? 5.What are the implications or consequences? 6.Can it be done in another way?
29 What arguments are Each reason: True, relevant, reliable and valid Give many reasons AND Make sure that there is proof for the reasons Reasons Decision
30 ReasonsDecision (Conclusion) Items of audit evidence Audit opinion (considering audit risk) From logic to auditing
31 Use logic: Can it be true? BDO Trevison (in Banco ABN Amro Real SA, 2007) concludes that the information in the report is adequately presented in all its relevant aspects. This includes statements such as:
32 Source documents 1 Jan. 31 Dec. Valid?? Complete?? Acc. Records Maintained?? Accurate?? ?? Audit risks = Control risks Need Internal Controls
34 Acc. Records G/LT/B Income Statement AFS: Balance Sheet Valid Complete Accurate Maintained Assertions: Value Existence Ownership Cut-off Disclosure Completeness
Conclusion and recommendations Conclusions from literature survey: Currently no minimum standards for competencies in sustainability assurance Very little research on competencies. Lack of language and semantics, logical skills, predict the future, 3 areas of TBL
Conclusion and recommendations (cont.) Recommendations: 1.Auditing firms to ensure competencies in teams 2.Careful with predictions and the future. Beware of full audits 3.Staff registered with IRCA until IFAC starts defining the competencies 4.Training and education providers to bring in the competencies and thinking skills into the syllabi
Conclusion and recommendations (cont.) Outcomes of thinking skills development Be familiar with use of good thinking habits Be able to master a good thinking process Be able to analyse arguments (reasoning) properly and make sensible conclusions Be able to identify the audit principles logically, to analyse them and to criticise them Using the above, to perform more logical, effective and sensible audits on BOTH FINANCIAL AND NON- FINANCIAL INFORMATION
39 Final conclusion 7 research opportunities identified The auditing profession should reconsider its role in society, whether to remain financial-only experts or to widen its scope to provide assurance on sustainability and on corporate governance. If the second one is chosen, the training and education requirements for auditors should be revisited and redesigned Let us all prevent the following of say nothing, hear nothing, see nothing: