Why Reasonable Assurance is needed on Sustainability Reports

We have just submitted our response to the AuASB's invitation to comment on Exposure Draft ED 02/24 Proposed Australian Standard on Sustainability Assurance ASSA 5010 Timeline for Audits and Reviews of Information in Sustainability Reports under the Corporations Act 2001 and thought it worthwhile to share some of our observations and concerns.

We do not support the proposals in the ED, and strongly believe the proposals are flawed, and will:

• Significantly delay users of sustainability reports being provided with reliable information as to an entity’s climate related risks and opportunities
• Allow greenwashing to go undetected
• Cause the users of sustainability reports to be confused as to what assurance is being provided and potentially misled
• Delay entities implementing the adequate processes and systems to provide reliable information in their sustainability reports
• Delay audit firm’s allocating appropriate resources to be able to provide assurance on sustainability reports.
• Cause preparers to undervalue the costs of providing assurance on a sustainability resource

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We believe that the premise that an auditor may be able to provide limited assurance, on potentially unreliable and supportable information, that they would not be able to provide reasonable assurance on to be fundamentally flawed.

The difference between reasonable and limited assurance, rests solely on the degree of audit evidence obtained. If an auditor would not be able to obtain sufficient appropriate audit evidence to provide reasonable assurance, because that evidence was not available, including the preparer lacking the processes and controls to provide such evidence, the auditor cannot provide limited assurance.

Limited Assurance is not, as it would appear the ED suggests, a version of a modified audit opinion relating to a limitation of scope. If an entity is not able to provide the auditor with sufficient appropriate audit evidence, that the sustainability report is in accordance with the requirements of AASB S2 and the Corps Act to enable the auditor to provide reasonable assurance on, then the auditor would be unable to provide limited assurance.

We believe the investor community, the auditing profession and the Australian taxpayer would be better served by the AUASB:

• Requiring reasonable assurance to be provided on sustainability reports prepared as a requirement of the Corporation’s Act
• Providing guidance as to which aspects of sustainability reports prepared in accordance with the Corps Act an auditor will be likely to be unable to provide assurance on
• Liaising with the AASB, as to which aspects of?AASB S2, require clarification on, and guidance so as be ‘auditable’.

The difference between limited assurance and reasonable assurance rests on the quantum of work performed and the amount of audit evidence obtained. If the entity’s processes and systems are inadequate to allow reasonable assurance to be achieved, then similarly limited assurance should not be provided. Limited assurance is not useful if it means ‘the information is most likely wrong, but I have not performed any procedures to definitely conclude it is wrong’. ?Limited assurance is not an alternative to a modified audit opinion.

If an entity has not put in place adequate processes and systems to produce information that is reliable for inclusion in its sustainability report or is unable to provide the auditor with sufficient appropriate audit evidence to allow the auditor to provide reasonable assurance, then all parties including the directors of the entity would be better served by that being clearly communicated to management and those charged with governance, rather than glossed over by way of an unmodified limited assurance report.

The preparation of Sustainability Reports under the Corporations Act 2001 will require companies to put in place appropriate processes and systems to ensure information provided to users is reliable. The phasing of the requirement to prepare Sustainability Reports under the Corporations Act 2001, is designed to allow adequate time for such processes to be established. Therefore, there is no need to allow a further 3 years phasing in reasonable assurance.

We believe that users of the information contained in the sustainability report, need information that is reliable, produced using the appropriate processes and systems. The provision of reasonable assurance on this information significantly assists users and directors of the entity issuing the report in determining whether this information is reliable and has been prepared using the appropriate processes and systems.

The proposed 3-year delay in providing reasonable assurance means that users and the directors of the entity issuing the report, may be presented with information that is not reliable, and the entity may delay for 3 years implementing the appropriate processes and systems.

The cost issue would appear to have been confused with the cost of the entity implementing the appropriate processes and systems to prepare information that is reliable and in accordance with the requirements of AASB S2, and somehow relates to an argument that there can be cost savings for delaying the implementation of appropriate processes and systems to prepare information that is reliable. If an entity has not implemented appropriate processes and systems to prepare information that is reliable, then the auditor issuing a modified audit opinion reporting that fact to users, will be very inexpensive.

The nature of performing assurance procedures will mainly involve using a controls-based approach and is likely not to involve a great deal of substantive testing. For an auditor to be able provide limited assurance on the sustainability report, they will have to have the appropriate understanding of the entity’s process and controls over preparing the sustainability report, therefore if the review is performed appropriately there will be little difference in costs between reasonable assurance and limited assurance.

In respect of the readiness of Group 1, 2 and 3 entities’ systems and processes, the legislation has allowed reasonable phasing for entities to implement the appropriate systems and processes. If entity’s have failed to implement adequate?systems and processes to provide users with reliable information, this should be clearly reported by the auditor.

To somehow suggest that limited assurance can be provided, even though the entity’s systems and processes are inadequate to provide users with reliable information is a completely flawed proposition. A sustainability report that contains unreliable information, generated by inadequate processes and systems, with an auditor’s unmodified review report, has no value to users, and is potentially very misleading. We can see no basis for suggesting a 3-year window, where this situation exists.