January 22, 2024
Auditing and Assurance: Bridging the Trust Gap

An external auditor must audit financial statements because it establishes credibility. In order to foster trust, sustainability reporting is also encouraged to be subjected to external assurance. Assurance is a vital aspect of establishing trust in the information presented. The third-party independent auditor's certificate is an important feature of every financial report. This certificate assures the user that any financial data mentioned in the report has been independently verified. In a similar vein, the assurance statement in a sustainability/ESG report is an important aspect of the document.

ESG concerns, unlike those of accounting and auditing, are diverse. Disclosure and assurance are largely voluntary and have a great deal of flexibility built in. A corporation with several locations and various sustainability challenges can pick and choose which topics and geographies to report on. In fact, some businesses may opt out of reporting on specified criteria or regions.

Role of audits in ESG: Identify & Verify

Internal auditing should entail identifying root causes, potential risk management techniques, and preventive procedures in addition to merely detecting hazards. It should also guarantee that the organization's governance, risk management, and internal controls are functioning properly. There are internal audits designed to work programs based on a combination of well-known standards that serve as a foundation for good practices, augmented with our internal expertise in internal audit and ESG. Internal auditors should review parts of the company's ESG policy that define it, such as high-level oversight, risk assessment, due diligence procedures, and awareness and implementation measures, as part of their evaluation.

ESG assurance must complete the following four tasks as it evolves and catches up with external audits to avoid a confidence deficit like the one that currently afflicts external audits.

1. Maintain its independence:

The consensus is unmistakable: external assurance relies on independence. However, the auditing profession has developed its own, less apparent idea of independence. An auditor can't be completely independent of the entity that hires, pays, refers business to and, potentially, dismisses it.

2. Look beyond offering cliche audit-like opinions:

It took the global financial crisis (GFC) and a long time for the audit profession to discuss important audit issues in the auditor's report. ESG assurance providers would do well to provide immediate opinions on critical assurance issues.

3. Demand that management stand by its sustainability reports:

These reports must be accompanied by a self-confirmation letter signed by the CEO and the members of the relevant board committee, stating that the report contains material truth, the whole truth, and nothing but the truth.

4. Ready and willing to submit to regulatory oversight:

Unlike an external audit, ESG certification does not require a lengthy and unsuccessful self-regulation experiment. When stakeholders inquire about who audits the auditor, those who provide ESG assurance should respond with an independent regulator, the same as the existing audit regulator.

To summarise, ESG assurance must mimic the expertise and experience of external audits while avoiding its faults in order to develop long-term trust, which is a difficult undertaking in any environment.

Assurance: Meaning and Significance

Management controls, internal audits, and external assurance views are all assurance examples. ISAE 3000 (UK) and ISAE 3410 (Greenhouse Gas KPIs) are the most extensively utilised external assurance standards for non-financial information. The scope of independent assurance is either:

1. Limited assurance:

This is a lower level of assurance than a reasonable assurance engagement, but it increases the intended users' confidence in the reported subject matter. A negative type of assurance is included in the practitioner's report, such as whether any issues have come to the practitioner's attention that leads them to consider the subject matter information is not provided, in all material respects as per the applicable standards. A limited assurance opinion is based on a half-year evaluation of financial accounts.

2. Reasonable assurance:

This is a high level of certainty, but it is not absolute. The practitioner's report comprises a favourable conclusion about whether the subject matter information is created in compliance with the applicable criteria in all material respects. A reasonable assurance conclusion is an opinion made for an audit of financial accounts.

Both types of assurance are adequate, but the reasonable assurance is more stringent than limited assurance. Reasonable assurance is rated higher than limited by many ESG grading agencies.

The level of assurance received by an organization will determine the extent of what is covered as well as the quantity of testing work necessary. Most opinions have limited assurance at the moment due to the relative infancy of ESG reporting and the cost/benefit connected with it. The entire statement and disclosures are audited and reviewed in financial statement audits and reviews. Most of the time, it will be selected KPIs or a specific section of the ESG report or yearly report for ESG reporting.

What are the benefits of getting Assurance?

While external assurance is still optional, an increasing number of bonds, loans, and facilities related to ESG KPIs need the underlying KPIs to be assured. Especially when ESG targets are now part of executive remuneration. Some benchmarks will require data to be confirmed by a third source, and internal audits or management verification will not suffice.

Whether it's public or private, KPIs with a high level of reliance and/or importance to your stakeholders will require a higher level of assurance (i.e., just for the benefit of the board). Some KPIs (for example, climate-related disclosures) that were previously solely covered by management controls or Internal Audit assessments are now being covered by both. However, they are now covered by External Assurance, which is based on reliance and relevance to the stakeholders.

Obtaining assurance has numerous advantages for the firm, its stakeholders, and investors. It adds to the credibility of the information being reported, challenges your organization's processes and encourages them to be more robust. Assurance educates the team's less experienced employees about the external reporting process. It also brings a fresh perspective to challenge and benchmark and Prepare for a greater emphasis on ESG reporting, which is likely to culminate in obligatory or complete report assurance.

Oren believes that now is the right time to put ESG assurance on track and help its clients do so hassle free! Irrespective of where you are on your ESG journey, Oren has a solution for you. Contact us today to speak to our panel of experts that are right for your industry.

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