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At a glance
As told to Susan Muldowney
Question: “I provide assurance services over sustainability and ESG reporting. A listed client has published ambitious carbon reduction targets and claims substantial emissions reductions during the year.
While reviewing the supporting evidence, I discovered that several emissions calculations rely on outdated assumptions that significantly overstate the reported improvement.
My manager argues the methodology is ‘close enough’ and says correcting the figures could negatively affect investor confidence.
The engagement partner reminds me that sustainability assurance is a rapidly growing service line and losing this client would have significant commercial consequences. How should I handle this situation?”
Answer: If your client is an Australian listed entity, it is likely subject to requirements under mandatory climate-related disclosure standard Australian Sustainability Reporting Standard AASB S2, which broadly aligns with IFRS S2.
These requirements set a relatively high bar for the evidence supporting climate-related disclosures, including governance, risk management, strategy, resilience and targets.
Sustainability and climate reporting is moving from largely voluntary disclosure to mandatory reporting, which establishes a baseline for the information companies provide to the market and the quality of the assumptions underpinning it.
In this case, the key issue is the underlying methodology and assumptions used to calculate emissions reductions. From an assurance perspective, these assumptions need to be appropriately tested and challenged.
The rollout of sustainability reporting and the associated assurance requirements is phased, recognising that organisations are still developing their data, systems and processes. Nobody expects companies to have everything perfect from day one, but a level of rigor is still required, and expectations will increase as organisations mature.
The engagement partner’s concern about the commercial consequences of losing the client should not be the determining factor. In fact, there is a strong counterargument. The information is being provided to investors, who rely on the credibility of reported information when assessing companies and allocating capital.
If outdated assumptions materially overstate emissions reductions, allowing those figures to stand could undermine the investor confidence management is seeking to protect.
The relevant question is not whether correcting the numbers might have a short-term commercial consequence for the assurance provider. It is whether allowing potentially misleading information to be reported creates a greater long-term risk to the company, its investors and the assurance provider.
If the methodology is subsequently challenged and the figures need to be restated, the consequences could extend well beyond the reporting entity. Questions would also be asked of the assurance provider about the rigour of its work and whether it adequately challenged the assumptions supporting the reported results.
The assurance requirements are designed to create consistency and a common level of rigour across the market.
An entity cannot simply choose a different assurance provider to avoid difficult questions, and other providers will be operating under the same underlying professional requirements. That is ultimately a positive development, because it helps establish robustness and credibility in sustainability disclosures.
There is also a broader reputational risk. Expectations around sustainability reporting will continue to increase among investors, regulators and other stakeholders. Treating a methodology as “close enough” today may create a precedent that becomes increasingly difficult to unwind.
This is where professional ethics become particularly important. Assurance professionals are bound by ethical and technical obligations that must take precedence over commercial considerations.
The fundamental question should be whether you are discharging your responsibilities without compromising your obligations of objectivity, integrity, competence and due care, as well as applying the appropriate level of independence and professional scepticism and scrutiny.
As a result, the best course of action is to document your concern, challenge the methodology and assumptions, and escalate the matter through the appropriate channels if management does not address the issue.
Commercial pressure is a relevant issue, but it should not override the obligation to provide assurance that meets the required professional and ethical standards. If accountants fail to meet their ethical obligations, the consequences extend beyond one engagement or one client. They undermine the credibility of the profession itself.
Production credit
Banner image Vaselena via Getty Images
