The greening of accountancy

The greening of accountancy

A new report by three Dundee University lecturers indicates howauditors must consider environmental issues when compiling their reports

Environmental issues are of increasing importance to the audit opinion expressed by the financial statutory auditor but, generally, it is only the larger audit firms which are responding to this potential area of risk in a systematic way.

Over the last year and a half, David Collison has worked with Rob Gray and John Innes – all based at Dundee University – in an extensive investigation into how statutory financial auditors are responding to the increasing demands made by the ‘green’ agenda.

A series of interviews with practising auditors plus an extensive postal survey have yielded a picture of an emerging awareness that environmental matters are not trivial and cannot be ignored. The bigger the audit firm the more likely it was to have taken steps to include environmental investigations within its audit process.

The statutory audit is affected by environmental matters in five ways: rapidly-changing and highly-complex legislation; the introduction of environmental management systems; newly-demanding standards from suppliers and customers (corporate and individual); employee concerns; and the activities of pressure groups and the media. The auditor needs to stay abreast of all these changes.

New areas of risk

Environmental matters represent an additional area of economic and audit risk. Much of this risk will be covered by existing accounting and audit processes and guidelines, most obviously contingent liabilities and provisions.

But the auditor must ensure that areas of additional risk are also audited.

There are already extra difficulties in financial statements and new areas of disclosure in the annual report and this impact is likely to increase in the future. The recent ASB discussion paper on provisions gives just one illustration of the potential complexity. Other countries are beginning to require far more extensive consideration of environmental issues in financial statements and it is essential that auditors are aware of these developments.

Clients too are increasingly likely to include specific statements, up to and including environmental reports, within the annual report. The auditors’ duty under SAS 160 is to read other information published with the financial statements and seek to clarify and/or eradicate any material mis-statements or differences in that information. Furthermore, it seems increasingly likely that audit firms may be asked by clients to express an independent, published opinion on environmental disclosure made by the client.

There is still a slow but inexorable growth in corporate environmental disclosure whether in stand-alone documents, electronically published or disclosed in the annual report. To date, accountants have not been much involved in attesting to such disclosures.

These developments exclude the predominantly consultancy-orientated activities of helping clients to develop environmental reporting and/or management systems, undertaking environmental reviews and taking on the verification role on the EU EMAS initiative.

Global complexities

The global and European environmental agenda is complex, rapidly changing and very difficult to predict, but there is clearly a global trend towards greater recognition of environmental issues in business and business-related legislation. Worldwide, most of the leading accounting bodies are placing an increasing emphasis on environmental issues in their pronouncements on financial reporting. Specific environmentally-related accounting and/or auditing guidance has so far been issued in the US, Canada, Netherlands and Denmark.

There are a number of key findings in the report. For most auditors, however, ‘environment’ is just another business issue and is treated no differently from any other area of actual and potential risk. For a small minority the moral dimensions and the longer-term implications of sustainability do suggest that environmental issues are qualitatively different from other matters.

UK businesses and their auditors face an uncertain environmental and legislative climate. It is often very difficult to assess from where the next major issue will emerge.

The researchers were concerned to discover that, although most of the big practices have initiated procedures within both their audit manuals/processes and their training schedules, the majority of auditors do not perceive environmental issues as requiring special attention. They are simply a part of knowing one’s clients’ businesses thoroughly.

Auditors’ views appear to be greatly influenced by their own experiences with particular clients and are thus diverse and related to specific subjects for specific clients rather than to a generic set of issues. There is a definite split in attitude and ability according to size of firm. The concern seems to be whether the smaller ones are really able to gain the expertise to recognise and respond to important environmental matters as they affect clients.

Larger audit firms

As you would expect, larger audit firms were more likely to be exercised by environmental issues and to expect them to have material financial consequences for their clients. They were also more likely to have introduced procedures into the audit manual, to have undertaken training of staff on environmental matters, and to have been approached for advice on environmental issues by their clients.

The principal areas of concern related to contingent liabilities, the valuation of land and the costs of complying with environmental legislation. Depreciation and the valuation of other fixed assets were recognised by a significant proportion of auditors as also being of concern.

Most of those who responded to the survey agreed that there is a need for non-mandatory guidance from professional bodies on environmental issues.

They were equally divided for and against the idea of an official auditing standard. Inclusion of environmental material in professional examinations was on balance supported by the Big Six but opposed by others.

The report’s authors heartily endorse such a move. They conclude that the profession must foster responsibility and accountability by seeking and getting accountants and auditors involved in compiling and attesting environmental reports. There must be constant monitoring of new management systems and their likely effect. Auditors and accountants should seek to explore the long-term agenda surrounding sustainability and the potential conflicts between accounting practice and environmental protection.

‘The Financial Auditor and the Environment’ was sponsored by the English ICA and written by David Collinson, Rob Gray and John Innes, all from the Department of Accountancy at Dundee University.

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