RegulationCorporate GovernanceBig Four in bloom

Big Four in bloom

The largest firms are champions of sustainability assurance, although financial expertise is not a pre-requisite

BIG FOUR FIRMS are crowned leaders in assuring companies that their sustainability reports are accurate and above board, despite businesses claiming financial expertise has no baring in their choice.

Environmental analysts Verdantix interviewed a panel of 15 international buyers of assurance services with combined revenue of $362bn (£226bn). Their findings show that the Big Four are dominating the sustainability assurance market even though respondents said financial expertise is not important when selecting a provider.

But why have companies opted for accounting firms if financial specialism is not high on the agenda, and what is the secret of the Big Four’s success if this is the case?

Verdantix published its Green Quadrant Sustainability Assurance Providers report, which highlights experience with regulation and similar standards as the deal clincher.

Been around the block
This is pivotal a company’s decision to work with an accountancy firm. Of the respondents 80% said past experience of relevant standards was “very important” with 20% claiming it is “important”.

Compare this to a fifth claiming financial accounting expertise is unimportant and none of them citing it as very important.

“Financial accounting expertise is not important for the engagement itself, but we are of the opinion that we need the credibility brought by assurance delivered by a financial auditor,” said one company.

Surveyors that didn’t place financial expertise high on the agenda explained that environmental information is significantly different to financial accounting, so there was no need to have an accountancy type business called in to provide assurance.

However, accountancy firms have built up their credibility and reputation as experts in compliance, standards and reporting – thanks to a behemoth of regulation brought in over the last decade.

Credit where credit’s due
Credibility is the driving force behind the assurance of sustainability reports. Nearly 90% said the main reason for seeking the guarantee was to add credibility to information presented to external stakeholders. Just 13% said meeting compliance requirements was why they invested in it and just 33% said to it was to attest the accuracy of the carbon information.

For the Big Four, which are used to working with global organisations and international standards, experience and credibility are in abundance, giving them the winning edge in the sector.

“Third-party external assurance is critical to trust, our reputation and our license to operate. It’s not enough to just put information out there. The statements made in the report are still a risk, so you can’t just assure the data,” a respondent said.

However, questions have been raised as to whether accountancy firms, brought in as auditors, should be allowed to audit numbers and then provide assurance on them. Although a company might want the credibility, experience and skills of a Big Four, will many of them seek two firms to audit and assure?

A way around this could be the up-and-coming integrated report. A business can merge environmental and financial information into its annual report, checked by the auditor. This approach removes the added expense of compiling two reports, and hiring two companies to audit and assure the data.

For example, Netherlands-based consumer products company Philips, has sales of €25bn. It combined financial and sustainability information into one report audited by KPMG.

This trend is growing. So much so, that the International Integrated Reporting Council (IIRC) has commissioned a working group to create a framework for all large organisations, to monetise environmental impacts and “integrate” them into its financial reports, due later this summer.

The working group is co-chaired by former ICAEW president and ex-Financial Reporting Council director Paul Druckman. Some of the world’s heavy hitters sit on the IIRC; including Charles McDonough (vice-president of the World Bank), and Leslie Siedman (chairman of the Financial Accounting Standards Board) among others.

For the untrained eye, it seems that although there are some benefits to sustainability reporting, it is an extra cost at a time when there are no mandatory requirements here or in the US. However, the UK government is currently consulting on a white paper to increase reporting requirements before 2015.

Even without the US and UK forcing companies to report on the issue, sustainability spend in the UK for 2010 was more than $144m, and the US $268m – by companies with more than $1bn in revenue. This is set to increase to $168m in the UK and $261m in the US for 2011.

Verdantix market size data 2011

 

Small firms can allay any fears they have that the Big Four will always dominate this lucrative market because there is work for everyone, according to James Beresford, Verdantix analyst and author of the report.

Although he concedes smaller firms have some “catching up to do”, there are issues specific to certain geographies that can work to their advantage because they have local expertise and experience, he said.

However, Beresford warns that if firms fail to invest and develop a sustainability assurance service line, they could find themselves having to break through a large barrier before they can enter the market.

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