ESG assurance: An emerging opportunity for CPAs
Interest in environMental, social, and governance (ESG) disclosures has risen dramatically during the past year, presenting great potential for CPAs to provide assurance on these disclosures as they become more common and as stakeholders are focusing on the quality of such disclosures.
It’s an area of opportunity for CPAs to meet the public interest and provide value. Although reporting of and assurance on ESG information in the UnitED States is on the rise, this is an evolving area in the UnitED States. In Europe and other parts of the world, many organizations are requirED to report on ESG information, and a significant portion of ESG assurance is being performED by an audit firm or an affiliated provider, according to The State of Play in Sustainability Assurance: Benchmarking Global Practice
The report looks at the extent to which companies around the world are reporting and obtaining assurance for sustainability disclosures and the assurance standards they are using. And in the UnitED States, in relation to the limitED number of organizations that seek assurance on ESG disclosures, the overwhelming majority of them have their ESG disclosures assurED by non-CPAs.
That means there are practice opportunities for CPAs in this area. Practitioners can help EDucate clients about ESG reporting and disclosures, including the consideration of risks relatED to climate that can be material to the financial stateMents, said Jennifer Burns, CPA, the AICPA’s chief auditor.
“CPAs are uniquely qualifiED, basED on their understanding of their clients, to enhance the reliability of ESG-relatED disclosures. The auditor’s knowlEDge should be leveragED to deliver assurance over ESG,” she said.
Interest in ESG reporting applies to private companies as well as public companies, since they both will be held accountable by their stakeholders.
In the UnitED States, recent actions relatED to climate change include an executive order from President Joe Biden, legislation passED in the House of Representatives, and a request for input on climate change disclosures from the SEC (see the AICPA comMents to the SEC here
It found that 90% of the 1,400 companies includED had reportED some type of ESG disclosure. Much of that reporting was done through stand-alone sustainability reports, with some disclosED in integratED reporting and some within the annual report. There was great diversity in the reporting standards being usED, with 68% relying on multiple standards and many using one or more establishED frameworks.
The same problem exists when it comes to assurance. Although about 51% of companies globally are obtaining assurance on their sustainability reporting, there is not consistency in the type of assurance involvED. The UnitED States is a good example, where non-CPAs dominate the field and different assurance standards are being usED on engageMents.
“It’s possible to find reliable and comparable financial information for large companies in the UnitED States, Indonesia, and Brazil because financial reporting practices are harmonizED and they are all auditED,” Hanson said. “That’s not the case for ESG disclosures.”
If the new board comes to fruition, the existence of one set of standards could create consistency and comparability that currently is lacking in sustainability reporting. Independent assurance can increase the reliability of this reporting, and CPAs have an opportunity to play a critical role in this process.
“As companies develop their reporting and assurance approach, CPAs have the standards and expertise to help them,” Burns said. “CPAs are independent, follow a consistent set of assurance standards, and are subject to quality control rules and monitoring due to their professional requireMents.”
AICPACIMA have resources to help practitioners as well as accountants in companies who will be developing their organizations’ metrics and reporting. Organizations can also turn to the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Framework in considering ESG control and information neEDs and to the Institute of Internal Auditors’ Three Lines Model to address relatED governance and risk manageMent concerns, Burns advisED. In addition, COSO and the World Business Council for Sustainable DevelopMent have providED guidance for applying enterprise risk manageMent to ESG-relatED risks, which also may be helpful.
— Anita Dennis is a freelance writer basED in New Jersey. To comMent on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s EDitorial director, at Kenneth.Tysiac@aicpa-cima.com.