The assurance market for sustainability reporting

BY NICHOLAS C. LYNCH, PH.D.
May 1, 2013

Editor's note: Also read "Assurance opportunities broaden," May 2013.

Research published in The Journal of Business Ethics in 2012 titled “Multinationals’ Accountability on Sustainability: The Evolution of Third-Party Assurance of Sustainability Reports,” explores the third-party assurance market for external corporate social responsibility (CSR) reporting. The authors, Paolo Perego and Ans Kolk, draw from a sample of 212 companies from the first half of Fortune’s Global 500 list to analyze trends in sustainability assurance adoption, assurance providers, standards adoption, and assurance quality during 1999, 2002, 2005, and 2008.

The authors separate assurance providers into four groups: accounting firms, specialists, certification bodies, and others. Specialists include environmental and management consultants while the “others” category includes academic institutions, nongovernmental organizations (NGOs), stakeholder panels, and individual auditors.

Results show a significant increase over time in the issuance of CSR assurance statements (21.4% in 1999 and 55.8% in 2008). Results indicate that accounting firms made up 51.7% of the total market share, with specialists and certification bodies accounting for 33.3% and others constituting 15% across the entire sample period.

The results indicate disparity in the use of assurance standards, with a large number of verifications not formally complying with any one standardized approach. Relevant standards for providing sustainability assurance include AA1000, Assurance Standard (2008), and ISAE 3000. The AA1000 standard, developed by AccountAbility, is an open-source set of principles that focuses on addressing CSR issues.

International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, is a set of basic principles and procedures for CPAs on how to conduct nonfinancial assurance engagements. The International Auditing and Assurance Standards Board (IAASB) issued the standard in 2003.

Other relevant standards include ISAE 3410, Assurance Engagements on Greenhouse Gas Statements, released by the IAASB in June 2012. ISAE 3410 addresses a practitioner’s responsibilities in identifying and responding to the risk of material misstatements in companies’ reporting of greenhouse gas emissions; it is effective for assurance reports covering periods ending on or after Sept. 30, 2013.

In the United States, Statement of Position (SOP) No. 03-2, Attest Engagements on Greenhouse Gas Emissions Information, provides guidance for practitioners in accordance with the AICPA’s Attestation Standards. Consistent with ISAE 3000, the AICPA’s Attestation Standards (AT Section 101) allow CSR assurance engagements in certain circumstances, including when the practitioner has adequate knowledge of the subject matter and reason to believe that the subject matter is capable of evaluation against criteria that are both available and reliable to a user. Assurers who fell into the “other” category did not seem to rely much on any of the aforementioned standards, raising doubts by the authors concerning the reliability of assurance provided by this category.

The authors explored trends in audit quality by looking at each assurance statement for the existence or nonexistence of 19 factors representing the minimum requirements of a high-quality assurance statement. The factors include the existence of a statement title; the existence of the name and location of the assurer; a statement of the manager's versus the assurer’s reporting responsibilities; a statement of assurer independence; a statement regarding the scope of the engagement; a stated objective of the engagement; stated competencies of the assurer; the assurance standard used; a summary of the work performed; a reference to materiality; and a general conclusion or opinion. The authors used a content analysis to score each assurance statement from zero to 27, where zero represents the lowest level of audit quality and 27 represents the highest level of audit quality.

The findings revealed an increase in overall audit quality from 1999 (average score of 9.72) to 2008 (average score of 12.93). The authors note that 12.93 is a relatively low score given that a score of 27 represents the highest possible level of audit quality, indicating substantial room for growth and improvement in the attestation function. This finding is indicative of the fact that the assurance market for sustainability reporting is in its infancy.

Trends in the quality of assurance statements per assurer reveal that professional accounting firms, with an average score of 13.71, and certification bodies (13.5) deliver the highest-quality assurance; whereas specialists (10.8) and “others” such as academic institutions, NGOs, and stakeholder panels delivered significantly lower-quality assurance, with “others” scoring an average of 5.89 out of 27. Assurance quality is therefore heavily dependent upon the type of assurance provider.

Nicholas C. Lynch ( nlynch@georgiasouthern.edu ) is an assistant professor of accountancy at Georgia Southern University in Statesboro, Ga.

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