The growth of assurance being provided on sustainability and integrated reports has required the auditing profession, through the Independent Regulatory Board for Auditors (IRBA) Sustainability Standing Committee, to consider the value to be achieved through the provision of assurance on those non-financial indicators that have been identified by the client. The Sustainability Assurance Engagement Practice Statement SAAEPS 1 (Sustainability Assurance Engagements: Rational Purpose, Appropriateness of Underlying Subject Matter and Suitability of Criteria) is aimed at providing practitioners with practical guidance on whether or not the preconditions for an assurance of this type of engagement exist. This is referred to as the rational purpose. Basically, it requires that the practitioner considers whether or not there is any value or benefit to a reader of a sustainability report in having assurance provided on a particular financial or non-financial indicator.
The objective of this article is to explain what the responsibilities of the practitioner are in determining whether or not to provide assurance on an identified indicator − in other words whether there is a rational purpose that makes it worthwhile for assurance to be undertaken on a particular indicator. There are two key considerations when determining if there is a rational purpose:
What aspects of the subject matter information are to be excluded from the assurance engagement and the reason for their exclusion?
Who selected the criteria to be applied to measure or evaluate the underlying subject matter, what degree of judgement was used, and is there any evidence of bias? It is expected that an engagement would be more likely to have a rational purpose if the intended users selected or were involved in selecting the criteria.
The guidance is quite clear in that the practitioner has to determine whether or not there is a rational purpose. This requires the practitioner to consider a range of factors, including the maturity of sustainability reporting by the reporting entity, the use of a recognised reporting framework and how this has been applied by the reporting entity, whether the indicators are commonly reported on by the industry, and whether there is a common understanding of how the indicators are reported on.
Key concepts to the saaeps 1 guidance provided
A key requirement to understanding the SAAEPS is the key concepts that provide the basis for the assurance engagement on the sustainability report. The sustainability information provides the basis for the subject matter information that is critical to determining that the sustainability assurance engagement exhibits a rational purpose, that the underlying subject matter is appropriate, and that the criteria that will be applied are suitable for the engagement circumstances.
Sustainability information This typically includes information related to the reporting of social, environmental, governance and economic performance, targets and outcomes. This information may be financial, such as a key performance indicator on training or rehabilitation costs, or non-financial, such as litres of water consumed, tons of paper recycled and any narrative disclosures, such as a policy on stakeholder community engagement.
Reporting infrastructure This allows for the production of relevant and reliable sustainability information and is central to the considerations of whether or not the sustainability assurance engagement demonstrates a rational purpose. It includes a combination of the application of a relevant reporting framework, the use of appropriate policies and procedures, ensuring that there are effective systems and controls, and essentially, governance and oversight.
Underlying subject matter, subject matter information and criteria This requires that the concepts that underly the subject matter, subject matter information and criteria used are well understood as they are also key in determining whether or not a sustainability assurance engagement demonstrates a rational purpose. The determination of the subject matter and the subject matter information is achieved through the identification of the criteria to be applied. There are two types of criteria, namely scoping criteria and measurement or evaluation criteria. So, for example:
The first level of understanding is the need to report on sustainability performance (this could be the sustainability report).
The second level is to determine what is to be reported (subject matter). This would typically include environmental, social, governance and economic performance.
The third level is to then determine what to specifically report on (subject matter information). In the area of social performance, this may be customer satisfaction.
Finally, what is actually to be measured and reported on (the criteria) in the area of customer satisfaction. This may be the number of customer complaints received.
Concluding on rational purpose
This SAAEPS has as its primary objective to provide practical guidance to a practitioner to evaluate, prior to accepting a sustainability assurance engagement, as to whether or not there is a rational purpose, that is, whether there would be value to the user of the assurance report relating to the assurance opinion provided. The guidance provided requires the practitioner to consider a number of specific areas. These include:
Whether aspects of the subject matter information are expected to be excluded from the assurance engagement and the reasons for their exclusion.
Who selected the criteria to be applied to measure or evaluate the underlying subject matter, and to what degree of judgement did this affect the assurance opinion provided. The engagement is more likely to have a rational purpose if the intended users selected or were involved in selecting the criteria.
This requires the practitioner to determine the need for the entity to report on sustainable performance, and if this is necessary, to determine what needs to be reported. There is an expectation that the responsible executives, with oversight by the governance structures, will agree to the reporting of those indicators that will provide the intended user with the necessary insight to make a decision. Hence, understanding the criteria used to determine what subject matter needs to be included is a critical decision point. The practitioner needs to have a good understanding of how management determined what to include or exclude to ensure that the intended users have the necessary information to base their decisions on.
Second, the practitioner needs to understand the context in which the information is to be gathered and reported on. It is essential that the practitioner obtains the necessary understanding of the macroeconomic factors, laws, regulations and industry practices within which the entity operates and how this can impact on the indicators to be reported on.
Third, the practitioner needs to assess the underlying subject matter, being the information that needs to be measured or evaluated. This information may include well-defined information that is widely used in the market, or it may be assumptions or an assertion made by management. If this information is not capable of consistent measurement or evaluation, it may not be possible for the practitioner to form an opinion it.
Finally, the practitioner needs to consider what reporting framework, related reporting systems and internal controls are being used by the reporting entity to develop the reporting content. The variability of the various reporting frameworks, systems and internal controls currently in use in reporting sustainability reporting requires the practitioner to assess the ability of that framework to be able to ensure the recognition, measurement, presentation and disclosure that will cater for the majority of the areas where the reporting entity may apply judgement.
SAAEPS 1 provides guidance to a practitioner that will enable him or her to assess the value of a sustainability report to the user. While this guidance is focused on understanding the decision-making processes that the practitioner will use, it is worthwhile for executive and governing bodies to be aware of the need to ensure that what is reported in a sustainability report is relevant to the achievement of the strategic goals of their businesses.
AUTHOR | J P Grist, member of the IRBA Sustainability Standing Committee