Auditors fail in duty to identify eco risks

Auditors risk placing too little emphasis on the potentially dramatic financial effects of their clients’ environmental exposure, claims research published by the English ICA.

The paper, The Financial Auditor and the Environment, expresses the most doubt about the ability of smaller audit practices to pick up on environmental issues. While most big firms have initiated specific procedures to address the exposure, the majority of firms have not. Yet all clients could be at risk.

Author David Collison, lecturer in the department of accountancy and finance at the University of Dundee, said: ‘Environmental expertise is unevenly distributed (among auditors), but environmental risk is pretty ubiquitous – even small companies can be exposed. Nobody can afford to be complacent.’

Although smaller firms could not be expected to contain the same environmental expertise as the biggest firms, Collison added, they needed to increase their awareness of the risks and recognise when to call in specialist help from outside.

The research, based on both interviews and postal questionnaires sent to a range of audit practitioners, found majority support for non-mandatory guidance on environmental issues from professional bodies. But questionnaire respondents were evenly split on the need for a full-blown auditing standard.

Collison said: ‘There is a case for some form of regulation in the fullness of time.’

Auditors’ education and training should also be developed, the report concluded, so that practitioners become more sensitive to potential conflicts between accounting practice and environmental protection. Professional examinations should also cover the potential significance of environmental issues.

The report also hints at the potential for auditors to expand their role into the compiling and signing off of environmental reports for their clients.

‘There is an inexorable long-term trend of growing concern with environmental issues,’ Collison said. ‘As a public interest profession, auditors should perhaps seek to widen their responsibility for reporting commercial responsibility.’