Our response to IAASB’s proposed assurance standard on sustainability-related information
James Barbour, Director, Policy Leadership, at ICAS provides a summary of our response to the International Auditing and Assurance Standards Board’s (IAASB’s) consultation paper on its proposed assurance standard on sustainability-related information.
In December 2023, we responded to the IAASB’s consultation on its proposed International Standard on Sustainability Assurance (ISSA) 5000.
As we set out in our 2022 paper ‘Sustainability assurance: Factors to consider’ we welcome that the IAASB has decided to create a new set of assurance standards covering sustainability-related subject matter with ISSA 5000 to be the overarching standard. We believe this decision reiterates how key a priority this topic to the IAASB and their swiftness in undertaking this project to ensure that this global baseline can be derived within a reasonable time frame is evident. We also believe it is important, as is recognised by the IAASB, for this standard to be framework-neutral, profession-agnostic and stand alone, in order to satisfy this global baseline objective.
While we are supportive of the proposed standard and believe that it can be applied to provide a global baseline for sustainability-related assurance engagements, we set out below several areas where we believe it can be improved.
The need for additional content in key areas
While we acknowledge that the IAASB will produce further assurance standards on specific sustainability-related topics, we want to see further content on key areas including materiality, and groups and consolidated information incorporated into the finalised standard.
Risk of fragmentation
We have concerns that there could still be fragmentation of sustainability assurance standards (and therefore, diversity in the performance of related engagements) which will cause confusion for assurance providers, users of sustainability assurance reports and other stakeholders, as there may be a lack of comparability across similar entities and/or industries. Fragmentation will also create additional complexity for multinational entities subject to reporting requirements in multiple jurisdictions. The prospect of potentially having to adopt multiple sustainability reporting frameworks that may require the entity to maintain multiple systems and varied processes, controls, and resources, combined with the required sustainability assurance obtained by the application of multiple sustainability assurance standards will undoubtedly add complexity and substantial costs for both preparers and assurance practitioners, and ultimately, investors.
A call for regulatory support across the globe
We believe it is essential that high-quality assurance, related ethics, independence and quality management standards apply to all those who are providing assurance on sustainability-related information. ISSA 5000 has the potential to serve as a global baseline in this regard, but it will need the support of regulatory bodies around the globe to achieve that objective. The IAASB’s ongoing dialogue with regulatory bodies is crucial in ensuring that the public interest is served.
The proposed relationship with ISAE 3410
Within the IAASB’s set of sustainability-related assurance standards specifically, we believe that there is a need for further clarity on the proposed relationship between the proposed ISSA 5000 and ISAE 3410, ‘Assurance Engagements on Greenhouse Gas (GHG) Statements’, to avoid inconsistencies in the nature and extent of procedures performed on GHG information. For example, at present, two different work efforts on limited assurance engagements over the same GHG information would be allowed, depending on whether the practitioner used ISSA 5000 or ISAE 3410. This may not be easily understood or transparent to all users of the related sustainability-related assurance reports.
Applicable ethics and quality management requirements
We strongly agree that practitioners that undertake engagements in accordance with the proposed ISSA 5000, should have to comply with relevant ethical requirements that are at least as demanding as those contained in the International Ethics Standards Board for Accountants’ (IESBA) International Code of Ethics for Professional Accountants (including International Independence Standards) (the IESBA Code). Additionally, practitioners should also comply with professional requirements regarding the firm’s responsibility for its system of quality management, that are at least as demanding as those contained in International Standard on Quality Management 1 (ISQM 1).
The requirements of these international standards are fundamental to serve the public interest and are key to the performance of quality assurance engagements. However, we acknowledge the challenges that will likely face assurance practitioners that are not professional accountants to comply with these requirements. As such, we strongly suggest that the IAASB develop further implementation guidance:
- For non-accountant assurance practitioners that choose to apply ISQM 1 or an equivalent.
- And when explaining how a practitioner can perform an analysis to determine whether other professional requirements are at least as demanding, such as a detailed comparison of other professional requirements and the IESBA Code, either working with IESBA or encouraging IESBA to develop and issue further guidance timely.
Ultimately, it will be for jurisdictional regulators to determine what is deemed to be “at least as demanding”. In order to ensure consistency of application there is a need for discussion between the IAASB and bodies such as the International Forum of Independent Audit Regulators (IFIAR) to seek to promote a common understanding and application of this threshold.
The use of the term ´sustainability matters´ when referring to information on sustainability-related risks and opportunities could lead to confusion, as this differs from the globally accepted use of the term ´sustainability’, which refers to sustainable development in relation to economies, society and the environment. These risks are better referred to as sustainability-related matters. There should be a clear distinction between matters concerned with sustainable development and sustainability-related matters that affect the organisation.
Limited versus reasonable assurance
We are supportive of the input that the IAASB has already received from its consultative advisory group and other stakeholders indicating that it’s important to clearly distinguish the incremental procedures that would be required for a shift from a limited assurance engagement to a reasonable assurance engagement in the future (for example, if mandated by law or regulation).
We would, however, like to see more practical guidance on how to better demonstrate the different levels of evidence required to be obtained and related documentation requirements for limited versus reasonable assurance engagements in the finalised standard.
While we are supportive of the proposed approach for the practitioner to consider materiality for qualitative disclosures and determine materiality (including performance materiality) for quantitative disclosures, we would like to see further examples better illustrating how these concepts are necessary. These could be included in separate guidance and do not necessarily have to form part of the finalised ISSA 5000 standard, which is intended to be designed as framework neutral.
However, we are not convinced that the proposed standard adequately deals with scenarios where an entity will be reporting under a double materiality lens. Given that reporting entities in the EU and others from outside, which are in scope of the corporate sustainability reporting directive, will have to comply with a double materiality approach, we believe this highlights the need for the proposed assurance standard to comprehensively deal with assurance engagements in relation to where this has been applied. We hold the view that the optimum approach to deal with this will be to include conditional requirements in relation to where an entity has applied a double materiality approach. Such requirements and related application material will need to reflect the more holistic approach that has been adopted by preparers and include matters to be considered by the assurer both in terms of completeness and in assessing the materiality of misstatements identified.
Understanding an entity’s system of internal control
In our view, further differentiation is needed between the work effort required with regards to understanding the entity’s system of internal control for limited assurance versus reasonable assurance engagements.
We also believe that further consideration needs to be given in explaining the terminology used at different places for example, “consider”, “determine” and “evaluate”, if these standards are going to be clear, particularly from a profession agnostic perspective.
We’re concerned that that the content is too prescriptive and does not appear to readily support innovation in the provision of assurance, for example, the use of technological tools such as AI, where it might not be clear where their use would contravene the proposed requirements.
Using the work of a practitioner’s external expert or another practitioner
We believe that further specificity is needed regarding the practitioner’s responsibilities when using the work of a practitioner’s external expert or another practitioner. By its very nature, sustainability-related information covers a wide variety of subject matters, which is one of the inherent challenges. This in many cases will require a wide range of technical skills and competences within the engagement team, supplemented by experts as appropriate to appropriately perform an assurance engagement on the subject matter information. The use of a practitioner’s external expert may therefore be crucial to the successful performance of such assurance engagements. We therefore believe that the standard needs to be comprehensive in relation to such circumstances which are likely to be pervasive. In situations where an assurer is using the services of a practitioner’s external expert or another practitioner and cannot be sufficiently involved in their work, we believe that further application material is required in proposed ISSA 5000.
Estimates and forward-looking information
As IAASB is aware, this is one of the more challenging areas for assurance practitioners. However, we firmly believe IAASB must revisit its approach to this area as it is rather weak. Indeed, it appears to recognise this via its statement in the consultation’s explanatory memorandum that this matter could be addressed further in a separate topic-specific ISSA in the future. While we recognise that there will undoubtedly be a need to revisit this area in the future, the current content is not yet at a satisfactory stage and more work is required.
Estimates are generally quantitative in nature and therefore are well served by the requirements and application material of International Standard on Auditing 540 (Revised) ‘Auditing accounting estimates and related disclosures’. However, forward looking information is more qualitative in nature and not readily applicable to the approach adopted in ISA 540 (revised). We note that the application material in proposed ISSA 5000 recognises this distinction, and this approach therefore needs to be better reflected in the requirements to ensure that this distinction is more clearly highlighted. In summary, separation is needed between the procedures required for estimates and those needed for forward-looking information. In both cases, the requirements related to those topics need to be aligned and consistent with existing IAASB standards.
Groups and “consolidated” sustainability information
Although we are supportive of the principle-based requirements in proposed ISSA 5000 on the sustainability-related information of groups or in other circumstances when ‘consolidated’ sustainability-related information is presented by the entity, we do not believe it addresses in detail the challenges for practitioners on multi-location or multi-site engagements. Also, it does not address the challenges of access and reliability of information related to an entity outside the control of the reporting entity. We agree that additional guidance on “group” information can be issued as a separate standard, and we believe it is essential that:
- Certain requirements and guidance be added to proposed ISSA 5000 before its finalisation, including a requirement for the practitioner to perform procedures on the aggregation/consolidation process of sustainability-related information and further guidance on materiality and the reporting boundary concept.
- The IAASB issue some form of implementation guidance for group engagements concurrent with the effective date of proposed ISSA 5000. We believe that issuing the finalised ISSA 5000 without any additional implementation guidance for group engagements will create a risk of inconsistent application of the standard for such engagements.
This is a complex matter, and we question whether greenwashing will always necessarily be a subset of fraud. This matter is not helped by the current lack of a globally accepted definition of greenwashing. We understand and welcome the use of proposed requirements and application material that are based on those in extant ISA 240. These provide a solid foundation, however, we'd like further consideration from the IAASB in order to meet the challenges that assurers are likely to face when encountering potential instances of greenwashing. This may include an entity inadvertently placing too much emphasis on positive aspects of its sustainability performance or by making narrowly focused statements that do not take account of the holistic nature of its activities.
The IAASB’s standards have recently made greater use of ‘stand-back requirements’ and this would appear to be an area where such a requirement, to take place towards the conclusion of an assurance engagement, would be of benefit in mitigating against the risk of greenwashing.